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Stores and Materials 
Control 

Including Procurement by Manufacture 
and by Purchase 



By 

MADISON CARTMELL, A. B. 

Consulting Industrial Engineer, Associate Member of 

American Society of Mechanical Engineers, Member of 

National Association of Cost Accoimtants 




NEW YORK 

THE RONALD PRESS COMPANY 

1922 



,,to° 






Copyright, 1922, by 
The Ronald Press Company 

All Rights Reserved 



NOV -4 '22 



^ 5*^:^^' 



PRICFACR 

This book presents the ^^cncral siibjocl of tlic procurement 
and handliiij^ of materials, from the initiation of the order for 
their purchase or manufacture to the shipment of the fuiished 
pr()(hict. It thus covers storeskeepiii};, niamifacturin}^ and ])»ir- 
chasiiij^, trealinj^ all from the point of view of the prodiiction 
executive. While there are several useful hooks dealing; with 
l)articular portions of the subject — with the work of the pur- 
chasiu}^ department, or the production department — there ap- 
pears a need for a work coverinj^ in a comi)rehensive way all 
the imjiortant phases of materials control. 

'J'he effort has been made to explain in detail the procedure 
to be followed in an effective system of materials control in 
both large and small organizations. The basic principles ap|)ly 
to both classes alike, .and in most cases the jjractice is the same. 
Special attention has been given to the prcxedure of the large 
plant, inasmuch as there the volume of work, necessitating 
close study of every detail, exhibits the problems involved on 
a scale which reveals clearly their essential elements. Details 
of practice should receive no less serious attention in the small 
concern than in the large one, though necessarily attended to by 
a smaller force and recpiiring a less detailed system. The only 
safe policy for the small plant that is to hold its own today, 
lies in simplifying and adapting the methods tested out in the 
big plant and found essential to sound operation, without 
slurring over or emasculating them. 

To show more plainly the stei)s in the necessary procedure 
and their interrelations a series of forms has been given, il- 
lustrating both simple and complicated systems of materials 
control and those ojjcrating imder special conditions. It is 

iii 



iv PREFACE 

believed that these are shown In sufficient detail and sufficient 
quantity to enable ready adaptation to meet individual 
requirements. - 

The author is indebted to many individuals and firms for 
material, suggestions, and criticism. Particular mention should 
be made of the assistance received from Mr. W. A. Langford, 
past president of the New York Association of Purchasing 
Agents, and Mr. L. F. Boffey, editor of The Purchasing Agent, 
in connection with a course of lectures on "Materials Control" 
given by the author at the New York University School of 
Commerce. In the same connection the author is indebted also 
to Messrs. Henry Hardenberg, general purchasing agent of 
The New Jersey Zinc Company; F. H. Hoyt, purchasing agent 
of The Standard Oil Company of New York; Fred Macklin, 
purchasing agent of The Consolidated Gas Company of New 
York; C. H. Weakland, purchasing agent of The National 
Cloak and Suit Company; and C. Frank Schwep, purchasing 
.agent of The Ingersoll-Rand Company. Appreciation must also 
be expressed for assistance received from Mr. Thomas Conyng- 
ton, who is largely responsible for the chapter on "Some Legal 
Aspects of Purchasing." 

Special mention is due likewise to Mr. R. E. Anderson, 
treasurer, and Mr. W. T. Birney, purchasing agent of the 
Winchester Repeating Arms Company, former employers; to 
C. E. Knoeppel and Company, Inc., industrial engineers, with 
whom the author has been associated, for permission to use 
material and data from their files ; and to Mr. J. P. Jordan 
and Mr. A. F. Stock, former members of the latter organiza- 
tion, for valuable criticisms and suggestions. 

Madison Cartmell 

New York City, 
October i, 1922. 



CONTENTS 



Part I — Introductory 

Chapter Page 

I The Problem of Materials Control ...... 3 

The Three Phases of Management 
The Importance of Materials Control 
The Control of the Inventories 
The Cycle of Manufacturing Operation 
The Test of Efficiency 
Materials Control and Discipline 



II The Organization of Control ........ 9 

Effect of Lack of Organization 

The Need for Specialization 

The Nucleus of Control 

Types of Manufacture 

The Storeskeeping Department 

Administration of Materials Control Department 

Functions of the Control Department 

The Decentralization of the Storesrooms 

Relation of Purchase and Control Departments to the 

Plant 
Other Service Departments — General and Cost 

Accounting 
Traffic Department 
The Inspection Department 
The Engineering Department 
The Office Manager 

Part II — Principles of Control 

III The Records and Mechanism of Control .... 25 

General Purposes of Control 

1. The Upkeep of the Inventories 

2. The Care of Materials 

3. Correlation of Production and Sales Program 

4. Materials as an Element of Cost 

5. Statistical Feature of Stores Control 

6. Classification and Valuation of Inventories 
Illustration of Procedure 

Classification of Orders 

Stores Orders 

Plant — Increase and Expenses Orders 

Charging the Stores Accounts 



vi CONTENTS 

Chapter Page 

IV The Stores Record Form 39 

Purposes of the Stores Record 

Information Furnished by Stores Record 

General Purposes of Information 

Methods of Keeping the Record 

Development of Stores Record Form 

Control of Ordermg by "Maximum" and "Minimum" 

Quantities 
Keepnig Track of Available Quantity 
Co-ordinating Requirements and Schedules 
Appropriating Material 

"Ordering Quantity" and "Ordering Point" 
"Running Totals" versus "Balances" 
Heading of a Stock Record 
Opening a Stores Record 

The Handling of Various Classes of Materials 
Increasing Inventories 
The Unclassified Stores Record Sheet 

V Pricing the Stores Records 58 

Necessity of Accurate Prices 
Advantages of Pricing Stores Record 
Recording Values 
Components of Material Costs 
Predetermining Costs of All Materials 
Methods of Pricing Requisitions 
Actual Costs versus Standard Costs 
Standard Costs 

Actual Cost Methods of Pricing Requisitions 
Average Cost Method for Pricing Requisitions 
Pricing Requisitions at Current Prices 
Inventory Adjustments 

VI Operating the Stores Records 70 

Reporting Delivery of Materials to Stores 

The Stores Requisition 

Routing the Stores Requisitions 

Handling the Requisition in the Storesroom 

Posting Requisitions 

The Stores Return 

Issuing by Specification 

Standard Parts List Record 

The Order Requisition 

Mechanical Posting of Records 

Accuracy of Stores Records 

Errors of the Storesroom 

VII Classification and Symbolization 86 

Business Classification 
Advantage of a Uniform System 
Plannmg a Classification System 



CONTENTS vu 

Chapter Page 

The First Steps in Classification 
Symbol ization 

Use of Symbols Facilitates Clerical Work 
Use of Symbols Maintains Standards 
Numerical and Alphabetical Systems 
Requirements of Symbols 

VIII Classification and Symbolization of Materials . 94 

Problem of Classification 

Function of Control Accounts 

Classification of Accounts 

Classification of General Stores 

Symbolization of General Stores 

Two Rules for Symbolization 

Classification and Symbolization of Service Department 

Supplies 
Symbolization of Unclassified Materials 
Classification and Symbolization of Products 
Classification of Special and By-Products 
Classification and Symbolization of Other Activities 
Classification and Symbolization of Adjuncts 

IX Symbolization of Cost Records 107 

Function of Cost Accounting 

Monthly Reports 

The Balance Sheet 

The Profit and Loss Statement 

The Burden and Cost Statement 

The Budget 

The Material Accounts 

The Cost Ledgers 

Explanation of the Chart 

Inventory Account Symbols 

Order Symbols 

X The Costing of Orders 117 

Methods of Costing Orders 

Cost Documents 

Handling the Cost Reports — The Time Cards 

Handling Stores Requisitions 

Handling the Stores Returns 

Reporting Deliveries to Stores 

Journal Entries 

Handling Expense Debit Slips 

Making Up Expense and Burden Statements 

Tabulating Production Order Costs 

The Work in Process Control Accounts 

XI Control of Inventory 131 

Effect of Policy on Inventory 
Inventory Carrying Charges 



viii CONTENTS 

Chapter Page 

The Consideration of Quality 
Control Procedure 
Determination of Ordering Points 
Determination of Minimum Ordering Quantity 
Economic Minimum of Manufacturing Cost 
Graphing the Consumption 
Control of Finished Product Inventory by Production 

Orders 
Planning for Materials and Supplies 
Control of Work in Process Accounts 
Control of Supplies and Non-Productive Materials 

XII Standards and Specifications 142 

Definition and Purpose 

Advantages of Standardization 

Determination of Standards 

Organization for Standardization 

Example of Standardizing Materials 

Example of Standardizing Product 

Specifications 

Model Specifications 

Specifications in the Purchasing Department 

Maintaining Standards 

Periodical Revision of Standards and Specifications 

XIII Arranging and Equipping the Storesroom . . . 156 

Functioning of the Storage Workers 

Planning the Storesroom 

Written Standard Practice Directions 

Location of the Storesroom 

Size of the Storesroom 

Storing Materials 

Allotment of Space in the Storesroom 

Aisles 

Symbolizing the Storage Spaces 

Mechanical Aids 

Standard Storage Units 

Bin Subdivisions 

Skids and Trucks 

Counting Machines 

Branch Storesrooms 

XIV Stowing Material 168 

Definition of Stowage 

Where Goods Should Be Stowed 

The Double-Space Method 

Treatment of Special Items 

Keeping Items Distinct 

Identifying the Materials 

The Bin Tag 

Surplus Stock 

Rules for Good Piling 



CONTENTS 



IX 



Chapter 



Page 



The Unit of Stowage 

Piling 

Counting 

Removing Goods 

Change of Location 

Verifying Inventories 

The Delivery System 

Procedure in Filling Requisitions 

XV Taking Inventories 183 

Steps in Establishing Materials Control 

Necessity for Taking Inventory 

Physical Inventory 

Advantages of Regular Checking Counts 

The Duplicate Tag Method of Taking an Inventory 

Preparations for Inventory 

Inventory Instructions 

Inventory Period 

Directing and Taking the Inventory 

Classification of Items to be Inventoried 

Special Instructions for Departments 

Inventory Tags 

Filling in the Tags 

Supervising and Comparing Inventory 

Pricing Inventory Items 

Final Steps 



XVI Organization of the Materials Control Depart- 
ment 

Summary of Responsibility 

Relation of Storeskeeping to Other Functions 

Relations with a Production Control Department 

Co-operaton between the Storeskeeping Groups 

Communicating between the Two Groups 

Organizing the Materials Control Department 

Functional Organization 

Function of the Planning Section of the Stores Records 

Division 
Personnel of the Planning Section 
The Function of the Recording Section 
Function of the Scheduling Section 
Function of the Accounting Section 
Organizing the Small Materials Control Department 
Organizing the Storage Division 
The Stowage Section of the Storage Division 
The Delivery Section 

Part III — Procurement by Manufacture 
XVII Organization of the Production Control Depart- 



Function of the Department 
Order Handling Procedure 



201 



217 



CONTENTS 



Chapter 



The Production Control Department 
The Production Control Manager 
Materials Control Supervisor 
Order Control Supervisor 
The Dispatching Supervisor 
Tool Control Supervisor 



Page 



XVIII Graphic Production Control 224 

Necessity for Graphic Method 
Function or Purpose 
Means or Machinery of Performance 
Description of Control Boards 
Control Board Operation 
Description of Dispatch Boards 
Dispatch Board Operation 



XIX Operation of Production Control Mechanism 

Origin of the Production Order 

Standard Practice Records 

Standard Parts List Record 

Standard Production Analysis Records 

Cost Sheet 

Identification, Instruction and Routing Cards 

Workers' Time Cards 

Standard Operation Symbol Code 

Stores Requisitions 

Scheduling Jobs on Control Board 

Registering Material Available for Production 

Forwarding Requisitions to Storage Division 

Dispatching Work to Shops 

Starting and Quitting Jobs and Registering Accomplish- 
ments 

Inspection Reports 

Computations Made by Dispatchers 

Handling Irregular Conditions 

Registering on Control Board Progress on Orders 

Posting Accomplishments to Progress and Follow-Up 
Records 

Making Up the Pay-Rolls 

Departmental Efficiency Reports 

Departmental Idle Time Reports 



239 



Part IV — Procurement by Purchase 

XX The Function of the Purchasing Department 

Preliminary View of the Purchasing Department 

Defects of Departmental Buying 

Specialized Purchasing 

The Purchasing Agent 

Increased Profits through Savings 



257 



Chapter 



XI 

Page 



CONTENTS 



Good Buying 

Records 

Contact with the Outside 

Personal Relations with Vendors 

Justifying Its Existence 

The Seven Stages of Purchasing 

1. Determining the Article 

2. Knowing the Market 

3. Selecting the Vendor 

4. Determining the Price 

5. Making the Contract 

6. Effecting Delivery 

7. Completing the Contract 

The Purchasing Department and the Organization 

XXI The Article 273 

The Selection of the Right Article 

Quality versus Price 

Essential Knowledge 

The Use of the Article 

Questionable Requisitions 

Technical Knowledge 

Specifications 

Classes of Specifications 

Materials from Vendor's Stock 

Materials Record 

An Illustrative Record 

Origin of Purchase Order Requisitions 

Checking 

Use of Data 

Orders Applying on Blanket Contracts 

The Quantity 

Control of Requisitions 

Fixing the Price 

XXII The Market 290 

The Background 

Forcasting the Market — General Information 

Statistical Agencies 

Graphic Presentation 

How to Make a Graph 

Speciiic Information 

Supply and Demand 

The Personal Side 

Correlation of Requirements and the Market 

Kinds of Prices 

Information on Vendors 

Delivery Conditions ; the Terms of Sale 



XXIII Seller and Buyer 



311 



Interrelation of Seller and Buyer 
Personal Contact with Vendors 



Xll 



CONTENTS 



Chapter 



Page 



Attitude of the Purchasing Agent 

The Legal and the Personal Ties 

Sources of Data 

Credit Information Forms 

Gratitudes and Bribery 

Acceptance of Favors and Courtesy 

Vendor Expects Correct Purchase Orders 

The Purchaser's Requirements 

Service Record 

Confidence 



XXIV The Price 



328 



Preparing to Issue a Purchase Order 

Quotation File 

Request for Bids 

Tabulation of Bids 

The Price 

Competitive Prices 

Price Maintenance 

Kinds of Price 

The Definite Price 

Price Based on Performance 

Current Prices 

The Cost— Plus Contract 

List and Net Prices 

Transportation Charges 

f.o.b. Destination 

Discounts for Prompt Payments 

Trade Acceptances 



XXV The Written Contract 



347 



Kinds of Contracts 

Blanket Contracts 

The Individual Purchase Order 

Fixing the Date of Delivery 

Difficulty of Effecting Prompt Delivery 

Advance Information of Factory Requirements 

Allowance for Time in Transit 

Time for Completion 

The Copies of the Purchase Order 

Inspection of Purchase Order 

Vendor's Acceptance of the Order 

XXVI Effecting the Delivery 361 

Vendor Naturally Remiss 

Follow-Up Work 

Appeal to Sales Agent 

Progress Reports 

Rush Orders 

"Ship and Trace" 

Mechanism of Follow-Up Work 

Following up the Transportation Companies 



CONTENTS 



Xlll 



Chapter 



Page 



Transportation Charges 

Freight Rates 

Bills of Lading 

Demurrage and Damage Claims 

Routings 

Discontinuing the Fol low-Up 

XXVII The Completion of the Purchase Contract . . . 377 

The Purchaser's Obligation 
Payment of the Invoice 
Registration of the Invoice 
The Flagging of Invoices 
Checking the Invoice 
Checking the Transportation Charges 
Receiving and Checking the Goods 
Adjustment of Discrepancies 
Payment of Invoice 

XXVIII Some Legal Aspects of Purchasing 401 

Necessity of Familiarity with Law 

What Constitutes Our Law 

Definition of a Contract 

Meaning of Agreement 

Acceptance of an Offer 

Value of Having Contracts in Writing ,^ 

The Parties to an Agreement J^ 

Consideration 

Lawful Purpose 

Sales Contracts 

Caveat Emptor 

Express Warranties 

Expressions of Opinions 

Implied Warranties 

Destruction of Subject Matter 

Mistakes in Contracts 

What Constitutes Fraud 

Alteration of Contracts 

Interpreting a Contract 

Rules of Interpretation 

Assignment of Contract 

Acting as an Agent 

General Agents 

Special Agents 

Liability of Principal 



XXIX Organization and Personnel 419 

Two Types of Purchasing Control 
Organization of Subsidiary Offices 
The Central Office's Purchases for Distant Plants 
Control of Subordinate Purchasing Departments 
Qualifications of a Purchasing Agent 



xiv CONTENTS 

Chapter Page 

Duties of Purchasing Agent 
Planning Division 
Quotation Division 
Scheduling Division 
Invoice Division 
Assistant Purchasing Agent 
The True Function of the Purchasing Agent 
His Characteristics 
His Position in the Organization 

Part V — Adopting a System 

XXX Systems, Records, and Forms 437 

Requirements of a System 
Systems Not Universally Applicable 
Delegation of Authority 
Revising a System 
Records 

Reliability and Adequacy 
Availability and Timeliness 
Permanency 

Development of Records 
Purchasing Operations and Records 
Forms — Advantages and Objections 
Forms Insure a Fixed Policy 



FORMS 



Form Page 

1. Chart Showing the Paralleling Procedures for Procuring Mate- 

rials by Purchase and by Manufacture .• • • ^^ 

2. Organization Chart of a Large Plant Operated According to 

Modern Methods 20 

3. Chart Showing Elements of Selling Price 29 

4. Simple Perpetual Inventory with Price and Value Spaces ... 43 

5. Simple Stores Record Form with "Ordered" Columns .... 45 

6. Stores Record . 46 

7. Modern Stores Record Carrying Balances 47 

8. Modern Stores Record with Appropriated and without Balance 

Columns 5^ 

9. Order to Stock Material 55 

10. Unclassified Stores Record 56 

11. Report on Cost of Manufactured Material 61 

12. Stores Requisition ^2 

13. Stores Requisition 73 

14. Slip to Accompany Requisition Returned for Correction . . 76 

15. Notice that Material Is Not on Hand TJ 

16. Stores Return 79 

17. Production Order Requisition 81 

18. Notice of "Danger Point" 82 

19. Daily Record of Balance 83 

20. Request for Count of Stock 85 

21. Chart Showing Classification and Symbolization of Main Accounts 97 

22. Chart Representing the Relationship Subsidiary Ledgers Bear 

to General or Main Ledger 112 

23. Summary of Materials Used — Credit 122 

24. Summary of Materials Used — Debit . 123 

25. Journal Voucher 126 

26. Expense Ledger Slip 127 

27. Cost or Estimate Sheet 129 

28. Graphic Record of Consumption 138 

29. Bin Tag I73 

30. Surplus Stock Tag I75 

31. Notice of Change of Location of Material 179 

32. Stores Delivery Tag 181 

33. Inventory Tag for Raw Material and Supplies 194 

34. Inventory Tag for Finished Product or Component Parts . . . 195 

35. Inventory Tag for Work in Process 196 

36. Inventory Record for All Materials in Stores 199 

37. Inventory Record for Work in Process 199 

38. Organization Chart of Materials Control Department — Stores 

Record Division 205 

39. Organization Chart of Materials Control Department — Storage 

Division 212 

XV 



xvi FORMS 

Form Page 

40. Organization Chart of Production Control Department .... 218 

41. Control Board (Opposite) 224 

42. Dispatch Board (Opposite) 226 

43. Standard Machine Practice Card 227 

44. Standard Parts List Record 228 

45. Standard Production Analysis Record of Auxiliary Small Tool 

Requirements 228 

46. Standard Production Analysis Record of Material Requirements . 228 

47. Progress and Follow-Up Record 230 

48. Identification Instruction, and Routing Card 231 

49. Material Requisition Card 232 

50. Material Credit Card 232 

51. Direct Labor Time Card 233 

52. Process and Final Inspection Report 233 

53. Idle Equipment Report 234 

54. Control Progress Strip 235 

55. Signal Tags for Control Board . 236 

56. Chart of Sourc s of Stores Receipts and Disbursements (Opposite) 252 

57. Purchase Order Requisition 287 

58. Extract from Report to Buyers (Babson) 294 

59. Summary of Statistical Agency Reports 295 

60. Graph Showing Price in Dollars per Gross Ton of Basic Pig, 

Valley, and Steel Bars, Pittsburgh 297 

61. Graph Showing Fluctuations in Price of Eggs in United States 

as Compared with Average of Monthly Figures for Four 

Years 299 

62. Price and Production Graft (Babson) 300 

63. Graph Showing How the Value of Three Relations Diverge from 

a Common Point as the Relationships Change 301 

64. Weekly Report of Materials Control Department 306 

65. Estimate of Consumption and Balances 307 

66. Record of Sources of Supply 309 

67. Vendor's Record of Buyer's Personality 314 

68. Report on Customer 315 

69. Purchasing Department Record of Dealers 326 

70. Contract Record 329 

71. Quotation and Past Purchase Order Record 330 

72. Purchasing Agent's Request for Quotation 332, 333 

TZ- Trade Acceptance Forms 344 

74. Purchase Order 3S4-3S6 

75. Supplementary Purchase Order 359 

76. Vendor's Acceptance of Order 360 

TJ. Post-Card for Routine Follow-Up of Delivery 363, 364 

78. Request to Vendor to Trace Shipment 366, 367 

79. Record of Purchase Material Received 376 

80. Typical Invoice 380 

8ia. Invoice Flag for Entry of Checking 381 

8ib. Invoice Rubber-Stamp to Replace Flag 381 

82. Purchase Materials Received Report 386, 387 

83. Back of Defective Material Rejection Report 389 

84. Memorandum of Discrepancy in Invoice 391 

85. Countercharge Memorandum 393 

86. Credit to Vendor Memorandum 393 



FORMS xvii 

Form Page 

87. Requisition for Check 394 

88. Vouchers Payable Register 396 

89. Remittance Letter 398 

90. Cash Disbursements Register 399 

91. Chart Showing Purchasing Department Organization 425 



Stores and Materials 
Control 



PART I 
INTRODUCTORY 



CHAPTER I 

THE PROBLEM OF MATERIALS CONTROL 

The Three Phases of Management 

The art of industrial management is to make the best 
possible use of the raw materials purchased, the men employed, 
and the capital invested in the business. Broadly considered, 
therefore, the management of a manufacturing business may 
be divided into the three phases of control of materials, of men, 
and of money. These three factors form the legs of the tripod 
of management; hence none of the three can be considered as 
more important than the other two. Methods of control aim- 
ing to make more effective use of one must exert a more or 
less beneficial influence upon the others. The instability of one 
will affect the stability of the others. 

Though the three phases of management are thus inter- 
dependent, the art of management cannot be profitably studied 
unless each of the three phases is separately taken up as a prob- 
lem by itself. Each leg of the tripod should be as carefully 
fashioned and as strongly constructed as possible, before the 
three pieces are ready to be welded together. 

The Importance of Materials Control 

The observation, however, that none of the three phases of 
management can be considered as more important than the 
other two and that all three must be given full consideration 
in any scheme of management is subject to some qualification. 
The object of business is to sell something at a profit — of a 
manufacturing business, to sell the thing produced or trans- 
formed at a profit. The manufacturing enterprise exists by 

3 



4 INTRODUCTORY 

virtue of the raw materials that enter the factory at one door 
and leave as finished goods at another door. Capital is invested 
in buildings, machinery, and other equipment for the purpose 
of making this transformation. The measure of the effective 
use of men and capital is determined by the economy, that is, 
the best possible use of time and materials between the entry 
of the raw materials into the factory and the egress of the 
finished goods sold. If we use the term "materials" in its 
broadest sense and in the sense used throughout this book as 
including the raw materials, the manufactured parts made there- 
from, and the finished goods assembled from the manu- 
factured parts, we may say that the control of materials is the 
foundation of all other forms of control and therefore of 
successful management. 

The truth of this assertion is made clearer if we consider 
the relation of materials control to the work of production. 
The cost of a manufactured product is composed of the 
three factors of materials, labor, and overhead. To reduce 
these costs to the lowest possible minimum per unit of produc- 
tion consistent with the quality of the output is the aim of 
industrial management. Economies in overhead depend upon 
the most effective use of plant and equipment. Economies in 
labor depend upon the direction of effort into its most pro- 
ductive channels. Both these aims are thwarted and the 
effort to economize is largely nullified, if materials are lacking 
when required and labor and machines stand idle; or if 
materials of poor quality or the wrong kind have been pur- 
chased and work is spoiled and rejected, with the attendant 
waste of labor and overhead; or if materials are stored in 
excess of manufacturing requirements and working capital is 
needlessly tied up in stock and floor space is put to unprofit- 
able use; or if materials are not stored and accounted for 
properly, and loss from waste, misuse, and careless handling 
results. 



THE PROBLEM OF MATERIALS CONTROL 5 

The Control of the Inventories 

How closely related is the care and control of the inven- 
tories to the fundamental principles of management is not 
generally realized judging from the inadequacy of most sys- 
tems of materials control. The profits of a manufacturing 
concern are largely dependent upon the continuous and un- 
broken operation of the production departments. The eco- 
nomical operation of these departments requires that they be 
supplied with materials without cessation. Every hitch in the 
supply, every breakdown of the flow from raw materials to 
finished goods, involves the wastes of lost time and idle 
machines. Therefore, materials must be procured and stored 
in the requisite quantities to supply every need of production. 

Yet the very necessity of maintaining an adequate supply 
of everything needed for factory operation tends to create 
the evils of oversupply and waste. Without effective control 
a large amount of working capital may be invested in materials 
which will not be used for months and even years to come, or 
never be used at all because of changes in style or manufactur- 
ing policy. Without adequate control also, materials may be 
transformed into more of one kind of finished parts and less 
of another kind than is required. Sales may be lost and pro- 
duction orders may be held up in consequence. It will thus 
be seen that the control of materials is fundamental not only 
to the orderly progression of a production program but also 
to the carrying out of a sales program and policy. 

Thus materials control in its broadest aspect embraces the 
control of the inventories of raw materials, parts, and supplies, 
of work in process, and of finished goods. Materials must 
flow into the factory in the volume required for production but 
without bringing into storage more than the minimum quanti- 
ties required to fill current needs. If the product is an 
assembled article or machine, parts must be manufactured in 
the volume required, and yet their stock must be maintained at 



6 INTRODUCTORY 

its lowest possible figure consistent with uninterrupted manu- 
facture. If customers' orders are filled from stock — as is the 
practice in the majority of businesses — fluctuations in the de- 
mand for finished goods or changes in their quality or style 
should at once react to the storesroom where the potential 
goods are stored in their raw state, and then from the stores- 
room to the purchasing department, if they must be purchased, 
or to the factory, if they must be made. 

The Cycle of Manufacturing Operation 

Storeskeeping is one phase only of the cycle of materials 
control. In any discussion of storeskeeping and the routine 
work involved, it is usual to begin with a description of the 
purchasing organization and the nature of its work. A little 
reflection, however, will show that the function of purchasing 
is dependent upon the sales and production policies and is in no 
respect an initial function or process that sets in operation 
other functions and processes. For this reason it has seemed 
preferable to the writer to arrange the order of presentation in 
this book with some regard to the sequence of materials con- 
trol in actual factory operation and to present first a general 
outline of the problems involved and the mechanism employed 
in controlling the inventories before discussing more detailed 
matters. Hence the work and mechanism of the purchasing 
department is described in the fourth part of this book, be- 
cause, as explained, purchasing, though preceding the be- 
ginning of the cycle of manufacturing operations, is subser- 
vient to the control of the inventories. 

The Test of Efficiency 

The ideal condition of the inventories of a plant would be 
one in which the turnover of all raw materials synchronized 
with the time needed to procure them in convenient quantity, 
in which all finished parts were assembled at periodical inter- 



THE PROBLEM OF MATERIALS CONTROL 7 

vals into finished stock, and in which few items of stock re- 
mained unsold for any length of time. The last of these three 
circumstances existed in the sellers' market experienced in 
recent years when buyers were eager to accept anything manu- X. 

facturers had to offer. In such a market prices are high 
enough to pay for inefficiencies in management and wastes in 
production and still leave a fair margin of profit. When, how- 
ever, supply equals or exceeds demand and the market belongs 
to the buyer, the state of the inventories very quickly reflects 
the relative inefficiency of the management. 

Just as the enterprise and business acumen of the merchant 
are reflected in his turnover, in the freshness and variety of 
his stock, and in the freedom of his shelves from shop-worn 
and unsalable goods, so the efficiency with which the average 
manufacturing plant is managed can be narrowly gauged by a 
close inspection of its inventories. The statistics of mercantile 
agencies show that most business failures are due to mis- 
management or lack of capital. Both causes mean the same 
thing — lack of control, and this lack manifests itself most in 
tying up working capital in useless or unsalable inventories. 

Materials Control and Discipline 

Just as the individual is largely rated by others at his own 
valuation, so the inventories — using the term in its widest 
sense — are valued by employees at the valuation placed upon 
them by their employer. If materials can be withdrawn from 
stores without proper authority, if spoiled work and scrap 
are allowed to accumulate around the plant, if employees are 
permitted to help themselves to such supplies for their own 
use, it is human nature for the workers to place a low valuation 
upon the things for the use or possession of which they are not 
held strictly accountable. Plant discipline begins with such 
accountability. Adequate materials control is the first step in 
the inculcation of such discipline. 



8 INTRODUCTORY 

Indeed the installation of methods of controlling materials 
is an essential prerequisite to the installation of methods of 
controlling the production of workers by measuring the time 
spent in given operations or in producing certain quantities 
of goods. Obviously the time spent in processing materials 
should not be measured and recorded unless the quantity and 
value of the material used is also measured. Although in 
every industry some attempt is made to allocate the time of 
productive workers to the particular processes or operations 
on which they are engaged, or to the particular goods pro- 
duced, in few plants is this control carried out in such detail 
as to bring to light all losses and wastes due to the mishandling 
of materials or to their lack at the point where required. Only 
by uncovering such leaks and wastes can the losses due to 
wasted effort and spoiled or useless material be eliminated. 
It is by the elimination of such losses that the utmost economy 
in manufacture is attained. 



CHAPTER II 

THE ORGANIZATION OF CONTROL 

Effect of Lack of Organization 

Some years ago the writer was employed in a plant where 
agricultural implements of different types were assembled from 
the parts kept in stock to fill customers' orders. When an 
order had to be filled for a number of machines, it frequently 
happened that the supply of a particular part was insufficient. 
The assembly would be started and then be put aside in its 
incomplete stage, and the customer's order would either be 
filled in part or deferred until the purchasing agent could pro- 
cure or the foundry and machine shops could manufacture the 
required quantity of the needed part. 

On the finished part stock shelves there may have been 
certain parts sufficient for the assembly of a hundred or more 
machines of one type and yet the foundry continued to produce 
those parts because production schedules were based upon 
bills of material. It is true that the office professed to keep 
records of the number of parts on hand; but so many parts 
proved defective or could not be found when wanted, and so 
many parts had been manufactured either in excess of or below 
the quantities called for in the production orders, that the 
office records were only approximately correct. They were 
useless in determining the exact number of machines of one 
type that could be assembled from the parts carried in stock. 

The Need for Specialization 

The condition of things described above illustrates the 
"guess-work" that passes for materials and stores control in 

9 



lO INTRODUCTORY 

many factories and plants. The management thinks that the 
manufacture of so many parts or so many units of production 
will be about correct; it believes that such and such quantities 
of materials will be required to fill the needs of production; 
and it guesses that there is enough stock on hand of this, that, 
or the other product to fill the sales demands for quite a while. 
It is true that many organizations big enough to require a 
storesroom with a clerk in charge do put their houses in order 
to the extent of determining the minimum quantities of indis- 
pensable materials and supplies to be kept on hand — and in 
the majority of cases this is about as far as the control goes. 
Most factory executives are proverbially reluctant to allow 
specialization in any work unconnected with actual production. 
They look upon the large amount of detailed clerical work 
necessary to the control of materials as "unproductive" labor 
and therefore an expense, which ought to be reduced to 
the bare essentials required for the purchase and storage of 
materials. 

In plants where this policy prevails it is not unusual for 
the department head who fails to maintain the schedule of pro- 
duction set for him to pass on the responsibility for the delay 
with the excuse that some essential material, or part, or supply, 
was not furnished in time. The department head probably 
blames the foreman, the foreman passes the blame to the shop 
clerk, the shop clerk places responsibility upon the purchasing 
department, the purchasing agent may blame the supplier, and 
the supplier, being outside the control of the factory, is per- 
haps after all the best person on whom to shoulder responsi- 
bility for production delays. The point is that the game of 
"passing the buck" is inherent in any system of management 
where responsibility for the performance of specific duties is 
not clearly and definitely fixed. To fix such responsibility it 
is obviously necessary to split up the work of materials control 
into as many functions as there are to be performed, and to 



ORGANIZATION OP CONTROL II 

make some clerk, or division, or section, or department, re- 
sponsible for the performances of each function. 

The Nucleus of Control 

The nucleus of the organization needed for materials con- 
trol are departments responsible for ( i ) the purchase of mate- 
rials, (2) their receiving, storage, and issuance, and (3) their 
movement within the plant. As will be explained in a later 
chapter, each of these departments may be expanded into a 
number of divisions and sections responsible for the perform- 
ance of particular duties, the number being determined by the 
size of the organization and the variety and complexity of its 
products. Under simple conditions of manufacture the organi- 
zation and mechanism will be correspondingly simple ; whereas 
the manufacture of a varied line of articles made up from many 
parts will require an organization of many "unproductive" 
workers if the productive work is to progress with automatic 
regularity from the receipt of raw materials into stores to the 
dispatch of the finished products from the shipping room. 

As the organization and functions of the purchasing de- 
partment are, for reasons previously explained, left for later 
consideration, in the discussion of the organization needed for 
control we have only to consider the expansion or evolution of 
the storeskeeping department under varying conditions of man- 
ufacture. A bird's-eye view of the organization and duties of 
the personnel in charge of the work of control is necessary if 
the details to be described in Parts II, III, and IV are to be 
fitted into the general scheme. 

Types of Manufacture 

The varying needs of organization will be seen if we con- 
sider the control problems involved in different types of manu- 
facture. Broadly speaking, all manufacture belongs to one 
of two types — "continuous" or "interrupted" — though both 



12 INTRODUCTORY 

types may be carried on side by side in the same plant. In the 
continuous type of manufacture production flows through the 
factory or the department, or a series of machines in a con- 
tinuous stream. The problem of control is so to synchronize 
the materials, machines, and men that there will be no interrup- 
tion to steady production. The finished goods are usually of 
one kind only. If the article manufactured is of a simple type, 
made in one piece, as in a glass works making plain standard- 
size bottles, or tumblers, or window glass, the organization for 
control purposes is relatively simple. If the article manufac- 
tured is complicated and made up of many parts and sub- 
assemblies, as in a bicycle factory or in a plant turning out 
but one or two types of automobiles, the control must be more 
elaborate and detailed. But in either case certain quantities 
of certain kinds of materials are required to produce a given 
quantity of goods; and as the goods are of one kind when once 
the routine between the purchase of the materials and the 
manufacture of the finished articles is standardized in all its 
details, the problem of control reduces itself to the maintenance 
of this standardized routine. 

In a plant manufacturing a variety of articles, it is appar- 
ent that production cannot be as continuous as when the same 
machinery and workmen are constantly occupied with the 
manufacture of the same article, and that the interruptions of 
production caused by changes from the manufacture of one 
article to that of another increase the difficulty of control. Yet 
in principle the problems to be solved are the same under both 
types of manufacture. The difference is merely one of degree 
or number rather than of kind. If the principles and methods 
of controlling the production of one article throughout its 
manufacture are clearly understood, the control of a varied 
line of manufactures merely involves the finding of the proper 
detailed methods to fit the case and then subdividing the duties 
and responsibilities among a staff of clerical workers and 



ORGANIZATION OF CONTROL 13 

storeskeepers large enough to attend effectively and rapidly to 
the volume of detail created by the manufacture of such a 
complicated line. 

As a rule it is not the highly organized industry manufac- 
turing an intricate line — as for instance a concern making 
many types of electrical instruments — that objects to the "red 
tape" of control. In such a plant it would be impossible 
without such control to manufacture at a commercial price. 
Smoothness of operation and economy in the use of time 
depend upon materials and parts always being available when 
and where they are required, and the tendency to extravagance 
and waste is reduced to a minimum when an effective control 
is installed. It is the management of the small concern with 
a relatively simple production problem which thinks it a waste 
of time to draw up the records needed for effective control, 
and which tries to economize in the clerical work involved in 
maintaining a smoothly operating and efficient production pro- 
gram. 

The Storeskeeping Department 

Every manufacturing concern, big or little, which maintains 
a storeskeeping department, does so for three purposes : ( i ) to 
order, receive and care for the articles kept in stores; (2) to 
deliver them on suitable request or "requisition"; and (3) to 
keep a record of the values of the articles received and de- 
livered and thus of the value of the inventories on hand. 

Where the volume of work in the stores department is 
sufficient to keep one or more men fully occupied with the 
physical labor of handling materials and supplies, and of 
caring for the stock, the two distinct phases to the task of 
storeskeeping — the clerical and the physical — are for obvious 
reasons best kept distinct but under the same supervision. 
The qualifications demanded of the employees in the two 
groups differ accordingly. The group handling the clerical 



14 INTRODUCTORY 

work is the guiding force of the "materials control department" 
and one of its duties is to maintain the record of what the 
other group has done and should do. The other group — the 
storage group — whose work is largely physical keeps only such 
records as it needs to carry out its duties and keep a check on 
the records of the other group. 

Administration of Materials Control Department 

The materials control department occupies a position in the 
handling of materials similar to that of the personnel depart- 
ment in the management of men, or of the inspection depart- 
ment in the work of passing on the quality and perfection of 
the finished product. Like the heads of the last two de- 
partments, the head of the stores organization should be 
responsible to the chief of the production organization, because 
the success of this organization depends to a large extent upon 
their furnishing, when and as wanted, the materials required in 
production. 

By placing the two groups in the stores department under 
one head, their work is correlated and each is made responsible 
for its part in the success of the whole. Co-operation can be 
obtained through friendly rivalry and mutual assistance in the 
difficulties which arise in ordinary routine work — and diffi- 
culties occur frequently enough. 

In a small concern the one supervisor will have ample time 
and skill for administering both phases of his department. In 
the very large organization efficient administration requires 
that most of his time be given to the clerical group where the 
more frequent and more important problems arise. For 
directly supervising the storage group, he will have a special- 
ist in storage problems as one of his chief assistants. When 
the work justifies it, the securing of another specialist as an 
assistant to supervise the clerical work is not a useless ex- 
penditure. 



ORGANIZATION OF CONTROL 15 

Functions of the Control Department 

Though few concerns have hitherto recognized the impor- 
tance of a proper stores or materials control organization, their 
number is steadily increasing as the fundamental importance 
of more systematic and controlled production is realized. 

In addition to keeping the stores records relating to the 
receipt and issue of materials, parts, and supplies, the control 
department lays out and schedules production orders for the 
producing shops, and purchase orders for the purchasing de- 
partment. As orders are based on sales probabilities and 
requirements, the preparation of the orders begins with the 
receipt and classification of sales orders. The control depart- 
ment translates these sales order requirements into shop terms 
and quantities, and is responsible for such planning and sched- 
uling of production and purchase as will insure shipments to 
customers on the dates requested or specified. 

In the manufacture of a wide range of assembled products, 
many production orders for the manufacture of parts and for 
their assembly into the completed product will be going through 
the shops at the same time. It is the primary function of the 
control department to keep track of these production orders, 
so as to insure the delivery of materials at the place and time 
they are required, and the return to the stores or finished stock 
room of the manufactured parts and completed articles. A 
secondary function of the department is to make the necessary 
entries on the stores records of the values of manufactured 
parts and finished goods as they are turned into stores after 
manufacture. Most of the clerical work involved in calculat- 
ing these costs of manufacture is done in the cost department 
(see Chapter X). To the control department falls the task 
of keeping track of the movement of materials and parts, and 
of entering on the stores records the figures supplied by the 
cost department as to the value of the production, i.e., the 
finished parts and finished goods. 



l6 INTRODUCTORY 

The Decentralization of the Storesrooms 

The size of a plant will largely govern the methods of 
storing and issuing materials, parts, and supplies. Though all 
the inventories are under the control of the control depart- 
ment and this department is responsible for their movement 
to and fro within the plant, it does not follow that the inven- 
tories are stored in one general storesroom. Where the manu- 
facturing departments are compact and the work is carried on 
in a small building, one storesroom centrally located may serve 
all storage purposes. Where manufacture is carried on on 
several floors, or where departments are located in different 
buildings, some decentralization of the storage department will 
be necessary though the control under all conditions remains 
centralized. The modern practice is to utilize as many sub- 
storesrooms as are necessary for convenience in manufacture, 
and to separate the stock rooms in which manufactured parts 
and finished goods are stored from the general storesroom in 
which raw materials and supplies are located. Nevertheless, 
however numerous the various storesrooms and whatever the 
classifications of materials, parts, finished stock, and supplies, 
one set of records controls the inventories as a whole. 

It is apparent that material of a heavy or bulky nature, 
difficult to handle and not likely to be stolen or misused, need 
pass through the operation of being "taken into stores" only in 
a technical sense. Lumber may be conveniently stored under 
a shed outside the building, heavy castings may be taken direct 
from the foundry to the shop where they are to be machined, 
or finished parts may be taken direct to the assembly floor if 
they are immediately required for the work of assembling the 
finished product. But wherever stores are located, their where- 
abouts as well as their value should be entered on the stores 
records. Such records are assured when no work is under- 
taken in a plant without a numbered order of some kind initiat- 
ing and directing this work, and when no materials, supplies, 



ORGANIZATION OF CONTROL 17 

and parts are used for any purpose whatsoever without a 
document (known as a requisition) specifying the number of 
the order, by which the nature of the work or the production 
to which the stores are to be appHed can be ascertained. 

Relation of Purchase and Control Departments to the Plant 

The relation of the purchasing and control departments to 
the other departments of the plant may be illustrated by con- 
sidering the procedure involved in filling their requirements. 
The process of ordering begins with the determination of the 
need for materials or supplies. This need is made known by 
means of a requisition (to be illustrated later) upon stores for 
the article, materials, or supplies required. Materials and 
supplies are secured by purchase from outside ; parts are usually 
manufactured within the plant, though under certain conditions 
or in some lines of manufacture, it may be better policy to 
purchase some of them ready made. 

The requisition or inquiry for the thing wanted first comes 
to the clerk in charge of the controlling stores records. He 
ascertains from the records whether the article called for is 
in stock and if not whether it is to be purchased or manu- 
factured. If the article has to be purchased the purchasing 
department is called upon to procure it; if it is to be manu- 
factured the control department sets in motion the requisite 
order and accompanying papers to initiate its manufacture. 
Through either route the required article reaches the stores 
department and is entered on its records, thus completing a cycle 
that may be illustrated by the following diagram ( Form i ) . 

Thus the control department is the agency through which 
pass all details of orders for articles to be made by the various 
departments of the plant. It receives the production order 
requirements from the clerk or the head of the division in 
charge of the stores records, plans the work, and schedules and 
routes it through the shops. 



I8 



INTRODUCTORY 



The purchasing department occupies a corresponding place 
in its relations to outside suppliers. It receives purchase requi- 



5T0RE5 RECORDS 



VENDOR * 



TJX 



PURCHASING 
DEPT 



CONTROL 
DEPT. 



MANUFG 
DEPT 



5T0RE5 REC0RD5 



C0N5UMING DEPT. 



Form I. Chart showing the Paralleling Procedures for Procuring Materials 
by Purchase and by Manufacture. 

sitions from the clerk in charge of the stores records, places 
the order, sees that delivery is made on time, makes certain 
that the material received corresponds with the specifications 
in the order, and looks after the clerical work involved in 
checking the supplier's invoice and passing it for payment. 

Other Service Departments — General and Cost Accounting 

Having discussed the relation of the stores and control 
department to the work of production, brief consideration 
needs to be given to the points of contact between the control 
department and the other service departments which carry on 
the work initiated by the control department. In the following 
discussion it should be understood that reference is made to 
departments some of which may be operated only in large 
organizations where the need for specialization in duties and 



ORGANIZATION OF CONTROL 1 9 

for placing responsibility leads to their creation. Whether or 
not such departments actually exist, their functions are per- 
formed by somebody in every plant. The size of the business 
and the varieties of its activities will naturally determine the 
departmental division of its operations into specialized func- 
tions. Form 2 charts organization that has the usual control 
department. 

The line of demarcation between the work of the general 
accounting department and that of the control department can 
always be clearly drawn; that between the control and cost 
departments cannot be definitely determined. The conditions 
of manufacture govern in each case. 

So far as concerns the purchasing and accounting for 
materials, the general accounting department should be re- 
sponsible for recording liabilities and assets of the concern, and 
the amounts due to or from outsiders, and for accounting for 
all distributions to be made to the general accounts from pur- 
chase invoices. The work in connection with purchases begins 
when the purchasing department has approved a seller's in- 
voice for material, and ends with the writing of the check for 
the amount due. In the sale of products the work of the 
general accounting department begins with the billing of the 
customer and ends with the crediting of the customer's account 
when the cashier receives a remittance. 

To the auditing division of the accounting department, if 
such a division exists, falls the task of making certain that no 
mistakes have been made in the bookkeeping work. 

In a large organization the control and cost departments 
have distinct duties and spheres of operation. In a small 
organization the functions of the two departments are occa- 
sionally merged under a control supervisor who is thus respon- 
sible for the correctness of the entries made on the stores 
records. 

The cost accounting department, so far as the control of 



20 



INTRODUCTORY 




ORGANIZATION OF CONTROL 21 

materials is concerned, allocates the responsibility for all ex- 
penditures, receives stores requisitions after they have been 
priced and items have been issued, posts the values of these 
requisitions to the proper orders and accounts, distributes 
overhead expense to departments and burden to products, and 
prepares the statistical statements of costs and operations for 
the guidance of the management. Its work is described in 
detail in Chapter X. 

Traffic Department 

The traffic department's work involves the routing of in- 
coming and outgoing shipments, and all other routine matters 
connected with the transportation of materials, especially pur- 
chased materials. The department is usually responsible to the 
office manager, whose duties will be explained later. 

The Inspection Department 

Where the nature of the production is such as to demand 
continuous inspection through the various stages of its manu- 
facture, the creation of an inspection department is essential 
to centralize all responsibility for quality, size, etc., of items 
of stores received and issued. Thus the work of this depart- 
ment is complementary to that of the control department, and 
as such is concerned with ascertaining that the manufacturing 
departments or vendors supply exactly what they have been 
requested to furnish. The standards to be used as the limits 
in the inspection of materials, parts, and finished goods are 
determined in advance as nearly as possible. The engineering 
department, the laboratory, and any other department of the 
organization should be at the call of the inspection department 
when it is necessary to determine the suitability of questionable 
contract materials. All manufactured materials are inspected 
in the shop either after the article has been completed, or 
operation by operation as the engineering department con- 



22 INTRODUCTORY 

siders best. Purchased materials should be inspected imme- 
diately after their unpacking. This inspection is made pre- 
ferably by the receiving department as agents of the inspection 
department. 

When passed by the inspectors, all materials are turned 
over to the stores department for delivery to the consuming 
departments as wanted. The place occupied in the organiza- 
tion by each of these departments is shown on the organization 
chart (Form 2). 

The Engineering Department 

The primary function of an engineering department is to 
develop definite standards for quality and composition of the 
product of the concern and its methods and materials of 
manufacture. Such a department may require a laboratory 
with one or more chemists under its control, not only for pur- 
poses of experimenting with new materials and products, but 
also for testing both purchased materials and those manufac- 
tured in the plant when requested to do so by the inspection 
department. In this way the engineering department helps 
to determine how and wherein the manufacture of articles 
can be improved and whether the vendor has shipped what 
he contracted to supply. 

The Office Manager 

The office manager of the organization is the authority 
for the purchase of office supplies. He should have a techni- 
cal knowledge of the materials used in office work and should 
standardize office supplies in the same way as the engineering 
department standardizes raw and manufactured materials. 

A description of the functions of other departments besides 
those mentioned does not come within the scope of this book, 
which is concerned only with departments responsible for 
securing and handling materials. 



PART II 
PRINCIPLES OF CONTROL 



CHAPTER III 

THE RECORDS AND MECHANISM OF CONTROL 

General Purposes of Control 

A brief description of the essential records and the mechan- 
ism used in a system of materials control may best be begun 
by enumerating the main purposes of control and describing 
the means and procedure required to carry them out. The 
purposes of control are : 

1. To keep the right quantity and qualities of materials on 

hand at all times. 

2. To care for materials awaiting use. 

3. To determine material requirements by correlating the pro- 

duction with the sales program. 

4. To furnish cost figures of materials and supplies used in 

factory operations. 

5. To furnish at any time statistics as to quantities on hand, 

on order, consumed, required, and so on. 

6. To determine the value of the inventories for the purpose 

of preparing financial statements. 

The survey to follow is merely explanatory of the mechan- 
ism used to carry out the above aims, a more detailed descrip- 
tion of records and procedure being left for later consideration. 

I. The Upkeep of the Inventories 

The first of the functions of materials control enumerated 
above relates to the upkeep of the inventories. To carry out 
this function, three things must be determined and made a 
matter of record, viz. : ( i ) the quality or grade to be ordered, 
(2) the quantity to be kept on hand, and (3) the time needed 
for procurement. 

25 



26 PRINCIPLES OF CONTROL 

The quality and grades of material to be used in manu- 
facture are matters that every concern settles for itself. In 
very few lines of manufacture can materials be ordered on 
the basis of price alone without a careful comparison between 
the price asked and the quality supplied. In some lines the 
necessity of maintaining a standard of quality may require 
that the raw materials and the product be put to laboratory 
tests and that a research department be organized to investigate 
the causes of defects in quality and to suggest remedial meas- 
ures. In the majority of cases, however, requirements as to 
quality are met by making a careful analysis of the kind of 
raw materials best adapted for a specific purpose and then 
reducing these requirements to exact specifications. These 
specifications are kept on file and used in the purchase of all 
materials that must fulfil certain requirements as to quality or 
size or both. The method of standardizing the items of stores 
and then drawing up specifications for use in their procure- 
ment are matters for later discussion. 

The quantity of an item of stores to be kept on hand is 
determined first by manufacturing requirements in the present 
and near future, and secondly by past experience in the time 
needed to procure the materials by purchase or to manufacture 
the parts or articles required in the shops. In the most simple 
system of storeskeeping, records are kept, usually in the form 
of a card file, to show the quantity of each item of material 
and supplies in the storesroom and the minimum quantity to 
be kept on hand. Originated to serve the purpose of a per- 
petual inventory so that the quantities on hand and their values 
may be ascertained at any time without taking a physical in- 
ventory, the stores ledger record has been developed until it 
has become the most important single record concerned with 
production and purchasing. A description of the several forms 
this record may take and the many purposes it serves is the 
subject of Chapters IV to VI. 



THE RECORDS AND MECHANISM OP CONTROL 2^ 

2. The Care of Materials 

While the necessity of having a place for everything and 
keeping everything in its place would seem to be essential for 
the successful operation of any storeskeeping system, many 
attempts to control the inventories break down at the start 
because of inadequate facilities for storing and caring for 
materials. A manufacturer who never for a moment questions 
the wisdom of buying all the materials and supplies needed for 
purposes of manufacture, often fails to realize the necessity 
of a considerable investment in fixtures and equipment and 
the need for considerable floor space, if a heavy investment 
in stores is to be cared for and items are to be handled and 
counted with the minimum of lost motion and liability to 
error and with the maximum dispatch. For every cent saved 
in interest on the capital cost of the storesroom equipment, 
dollars may be lost through waste, oversight, and needless 
handling where the necessary fixtures, fittings, and weighing 
and counting machines are lacking. The arrangement and 
equipment of the storesroom and the method of stowing ma- 
terials are thus details in the general plan of control sufficiently 
important to merit careful consideration and study. To the 
discussion of this matter two chapters are devoted in Part 11. 

3. Correlation of Production and Sales Program 

To insure a regular turnover of the inventories and thus 
the minimum loss from dead stock and capital necessarily tied 
up in stores, it is essential for the production program to be 
based on a careful estimate of what the sales may be expected 
to be during the coming quarter, half-year, or year. The 
longer the period covered by the estimated sales budget, the 
better the provision that can be made to meet the production 
requirements. If, as is the practice in the management of 
many businesses, the estimate of future sales is based on 
hopes and expectations rather than upon careful calculation. 



28 PRINCIPLES OP CONTROL 

the production program will be liable to frequent change and 
it will be difficult to estimate material requirements for any 
length of time ahead. Under these conditions, either materials 
must be carried in stock in sufficient quantity to provide for 
all possible contingencies, with swollen and wasteful inventories 
as the consequence; or the attempt to keep the inventories as 
low as is compatible with the needs of production is likely to 
result in the disorganization of production routine because of 
lack of materials and supplies. 

Proper materials control, therefore, begins not in the pur- 
chasing, but in the sales end of the business. It falls upon the 
sales department to furnish the production and control depart- 
ments with estimates, on which these last departments can 
base their purchasing and production programs. 

It is not intended to imply, by the emphasis placed on the 
importance of the sales estimate, that the sales department 
wholly determines the production program and therefore the 
quantity and kinds of materials to be purchased and carried in 
stores. A sales program must be trimmed to and attuned to 
the productive capacity of machines and departments and some- 
times to the supplies of materials available or procurable. The 
point is that the sales manager, factory superintendent, and the 
head of the control organization must get together and map out 
the production program in its every detail, which detail goes 
back to the materials in the storesroom and the quantities that 
will have to be purchased to cover future requirements. 

4. Materials as an Element of Cost 

The profit of a manufacturing enterprise is the margin 
between what is received for the product and the cost of its 
production. Production costs are made up of materials, labor, 
and burden; that is, of the purchase price of the materials 
used and the wages paid in producing a certain article, or a 
number of parts, or a given lot of goods, and a proportion of 



THE RECORDS AND MECHANISM OF CONTROL 



29 



the general expenses incurred in operating the factory. The 
wages and materials costs are termed "direct costs" because 
they can be charged direct to the job or process; the overhead 
charges are known as "indirect costs" because they are charged 
to the job or process upon some indirect factor, such as the 
time spent in producing the article, lot, or parts. 

A major item of cost in every plant is that of the materials 
consumed; in certain industries, especially those engaged in 
producing articles of every-day consumption, materials often 









PROFIT 
10% 




' 


J5EL_LiNG*_ 

^AOMINliTRATlVE' 
/.EXPENSE'/ 

'//)ry//. 








BURDEN 
13 7o 






LABOR 




y////y 

, MATERIAL/ 





Form 3. Chart Showing Elements of Selling Price 
Shaded portions represent influence of materials. 

cost more than either labor or overhead. The above chart 
(Form 3) illustrates the elements of the cost of a product in 
which the material cost is assumed to be half the selling price. 



30 PRINCIPLES OF CONTROL 

It falls Upon the stores and control departments to keep 
track of the materials issued for manufacture so that their 
consumption may be traced and allocated to the job or process 
on which they are used, and so that supplies may be charged 
to the department where they are consumed. The means of 
withdrawing items from stores and thus tracing and allocating 
their cost, is by surrendering a stores requisition specifying 
the kind and quantity of the particular item requisitioned and 
the purpose to which it is to be put. 

A stores requisition is thus a written order on stores to 
deliver certain material for use the value of which is to be 
charged to a suitable account. The requisitions, after being 
priced, form the basis of credit to the stores inventory account 
and particular accounts controlled thereby, the offsetting charge 
being to Work in Process, Burden, or Expense. The account- 
ing procedure, so far as it concerns the control of materials, 
will be fully discussed in later chapters. For the present it 
need merely be understood that material for one order or 
account only can appear on one requisition. The principle and 
practice are the same with all kinds of materials. 

5. Statistical Feature of Stores Control 

In modern factory management the tendency is more and 
more to control production by means of budgets and estimates 
of requirements, based on the future sales program and the 
ability of a concern to finance the estimated volume of pro- 
duction and sales. The economy of first preparing such esti- 
mates and then carrying out the buying, production, and sales 
programs according to plan should be apparent. In the chain 
of factory operations between the purchase of raw materials 
and the shipment of finished goods, expenditures are constantly 
being incurred and financial provision must be made for them 
before they arise. If the minimum amount of capital is to be 
tied up in the materials requisite for carrying on these opera- 



THE RECORDS AND MECHANISM OP CONTROL 31 

tions, it is necessary for the management to receive frequent 
and regular statistical reports of the capital tied up in the 
inventories, of the values consumed in production, and of the 
financial obligations incurred in materials ordered but not yet 
delivered and taken up on the books. The form and content 
of these statistical reports vary with the nature of the prod- 
uct. In general, however, records are kept by the control 
department to show the movement of materials in and out of 
the stores department day by day, so that at the end of a 
given period the daily totals may be summarized to furnish 
the required statistical information. 

6. Classification and Valuation of Inventories 

We have seen that all materials, wherever located, are 
under the control of the stores organization, and that every- 
thing manufactured or purchased, after counting and valuation, 
is recorded on the stores ledger records until such time as it 
is drawn out for use on an order or for disposal in some other 
way. Thus, whatever material is represented in the stores 
accounts should also be in the custody of the stores depart- 
ment. 

For purposes of control it is convenient to classify the 
material handled by the stores department into four groups, 
according to its intended use, as follows: 

(a) Raw materials and supplies stores, usually known as 

general stores. This classification includes all materials 
purchased from outside which have not been processed 
in the plant, and sometimes certain supplies made within 
the plant. 

(b) Component parts stores, sometimes known as "worked 

materials" stores. This includes all materials that have 
been partly or completely processed as a step in the com- 
pletion of a finished or assembled product. 

(c) Finished product stores. This includes all completed prod- 

ucts ready for shipment on sales orders. 



32 PRINCIPLES OF CONTROL 

(d) By-product stores, sometimes known as "salvage" or 
"scrap" stores. This includes all obsolete or scrap mate- 
rials or supplies no longer needed or unusable in pro- 
duction without reclamation. 

The total value of whatever is in each class of stores is 
the inventory value of the financial controlling account for 
that class of stores. The account is charged with whatever 
is received, and is credited with whatever is delivered. When 
material is delivered for production, its value plus the value 
of the labor expended on it and a portion of the overhead 
expense, is charged to an order of some kind, the forms and 
content of which will be discussed later. The order while in 
process belongs financially to the inventory account known as 
"Work in Process," and this account is credited with the value 
of the finished parts of goods turned into stores. There is 
usually one work in process account for each stores inventory 
account. 

The usual manufacturing cycle in a factory making a 
product in pieces or assembled from parts (and this means the 
majority of factories) is for raw material to be received into 
general stores, requisitioned out for work in process, turned 
into component parts stores, requisitioned out again for work 
in process, and finally turned into finished product stores where 
the completed article is ready for sale to customers. Part of the 
raw material may find its way into by-product stores as scrap. 

The above classification of the stores and work in process 
accounts is sometimes modified by subdividing the accounts 
into two or more subsidiary accounts. This is done whenever 
the value of a particular material is large or when a closer 
control over the material is desired. For instance, a motor 
manufacturer divides his raw materials and supplies into four 
classifications : pig iron stores, steel stores, coal stores, and 
miscellaneous or general stores. A stove maker classifies his 
finished products and work in process as ranges or as stoves. 



i 



THE RECORDS AND MECHANISM OP CONTROL 33 

(a) General Stores. Every manufacturing concern 
transforms some kind of raw materials into parts or finished 
product, or both, and uses many kinds of suppHes in process- 
ing the raw materials, such as belting or oil, and in addition 
various office supplies. These materials may be secured from 
outside concerns by means of purchase orders, or for reasons 
of economy or speed of delivery some supplies may be manu- 
factured within the plant. However procured, these materials 
are passed into and held in general stores until such time 
as they are requisitioned out for use in connection with a 
production order, or in the current routine work of some 
department. Their value becomes a direct charge to either the 
department or to the order on which they are used. 

(b) Component Parts Stores. Materials are re- 
ceived into component parts stores under the conditions already 
outlined. They may be in any stage of completion, either in 
the usual form of fully processed parts and sub-assemblies, or 
of partly processed parts. Though they may be sold as parts 
for repairs or used in other ways by the sales department, the 
purpose of the processing is to make completed parts; and 
when complete as parts, to assemble them into completed units 
of finished product. Component parts may be purchased from 
outside or may be manufactured and assembled inside the plant. 
A material may become a part of component parts stores any 
number of times, but each time it will have advanced further 
toward the finished product stage. 

(c) Finished Product Stores. Everything which has 
reached its final stage of manufacture and is ready for ship- 
ment to a customer is held in finished products stores which, 
as explained before, may be subdivided according to classes 
of products. It is the final place of account for products be- 
fore delivery. The term "model" is usually applied to the 
article which has reached its final stage in production. 

(d) By-Product Stores. Scrap and obsolete materials 



34 PRINCIPLES OF CONTROL 

have a value that needs to be considered in the inventory ac- 
counts. Such material may be put into shape for sale, or it 
may be reconditioned for use. Accordingly, it is accounted 
for in the same way as any other material under a suitable 
heading such as "by-product stores." 

Illustration of Procedure 

The procedure and routine involved in stores control may 
be illustrated by a description of the manufacture of a simple 
article such as that of cartridges. Cartridges are made in 
many varieties, of which the one known as ''22 short" is 
probably the most widely sold. They are usually manufactured 
in a large quantity, and the production problem resolves it- 
self into balancing the number of machines so that the total 
production on all operations of all parts and assemblies is 
equal. Side by side with this continuous manufacture, another 
type of cartridge may be turned out under interrupted manu- 
facture wherein the process is broken into many stages. A 
brief survey of the processes of manufacture is necessary to 
indicate the stores problems involved. 

The first step in the production process is to punch a cir- 
cular disk of metal from a brass sheet; then to draw the disk 
into a cup-shaped piece which is alternately annealed and fash- 
ioned in several operations into the form known as the "shell." 
After the shell is shaped and trimmed, a primer is inserted in 
the head of the shell. This primer is an assembly of a smaller 
shell, which has been similarly processed and then filled with 
a high explosive. The shell assembly is then almost filled with 
powder. After this operation an assembled bullet is wedged 
into it, and the cartridge is finished. 

Machine breakdowns, absent operators, and bad materials 
are causes of trouble to the control organization. The use of 
various raw materials, the change in unit in the punching of 
cups from sheets, the need for the proper quantity of parts to 



THE RECORDS AND MECHANISM OF CONTROL 35 

make up the assemblies, the management's desire for knowl- 
edge of costs — all these matters form stores and materials 
problems the solution of which falls upon the control organi- 
zation. 

In the example given above of cartridge manufacture, the 
sheet of brass from which disks are punched is the first step 
in the manufacture of the cartridge shell. The sheet has lost 
its identity and has been transformed into a number of small 
disks which can no longer be handled on the basis of weight, 
but have become individual units. It is necessary for the 
control department to know the quantity and the total and unit 
value of the cups processed, as a means .of checking the effi- 
ciency of the machine, or of the brass-rolling mill, or for plan- 
ning future production. This information is also wanted by 
the cost department, in order to check actual costs against 
estimated costs, and to record the value of the inventory in 
the accounts. If this information is to be available, the value 
of the material at whatever stage it has reached must be 
known. 

If one size of brass cup can be used for various sizes of 
cartridge shell, it may be economical to make the cups in very 
large quantities, although the succeeding processes may be best 
handled in smaller lots. In such cases production is not con- 
tinuous, but proceeds step by step until the finished product 
is turned out. Under any of these conditions the number and 
value of the cups made must be known, in order to control 
labor and production. 

In the case of the manufacture of brass sheets for car- 
tridges, copper, zinc, and other materials have been requisi- 
tioned from general stores, melted, cast, and rolled — and then 
turned into component parts stores in the form of sheets. 
When the sheets are later requisitioned from stores for use on 
a production order for processing cartridge shells, their value 
is charged to the Work in Process account. At whatever 



36 PRINCIPLES OF CONTROL 

stage the processing of the shells may stop, the material is 
turned into component parts stores as component parts and the 
Work in Process account is credited, while Component Parts 
Stores is charged with the value. 

When a production order is issued for assembling the 
cartridge, the final product, shells are withdrawn on a requisi- 
tion, with powder, bullets, and primers, for the manufacturing 
department. All items are charged to the proper production 
order, which is included in the Work in Process account. 
When the cartridge is completed it is turned into finished 
product stores, the Work in Process account being credited, 
and the Finished Product account debited. Thus from one 
stage to another a complete transfer on the control and finan- 
cial records has been made, although the material may or may 
not have been moved through the storesroom each time. 

Classification of Orders 

Stores orders are of two kinds : purchase and manufactur- 
ing. Both originate from the stores records. Purchase orders 
are written by the purchasing department when ordering 
material from outside concerns. Manufacturing orders are 
written by the control department upon manufacturing depart- 
ments. The effect of both kinds is to increase the value of the 
stores inventory accounts. The control department also 
handles and schedules two other kinds of orders — expense 
orders and plant increase orders, which originate not from the 
stores records but upon the request of such executives as 
have the authority. The nature of these orders is explained 
below. As all orders afifect one, two, or all of the inventory 
accounts, their origin and use must be carefully noted. 

Stores Orders 

The two kinds of stores orders, purchase orders and manu- 
facturing orders, are much alike, both being issued to secure 



THE RECORDS AND MECHANISM OF CONTROL 37 

items of stores. A manufacturing order Is placed for the 
manufacture, within the organization, of parts and products, 
while purchase orders calling for an exact quantity of a 
specified material to be delivered on a definite date are filled 
from an outside source. 

Plant-Increase and Expense Orders 

The other two classes of orders — expense and plant-increase 
— cause the withdrawal of material from stores, but do not 
permanently increase the net inventory total of any of these 
stores accounts through the turning of material into stores. 

Plant-increase orders are issued for the installation of new 
equipment, for the manufacture of tools, or machines, or for 
the erection of buildings. Expenditures on such orders in- 
crease the permanent capital investment of the business. Their 
issuance must have executive approval and be provided for in 
the budget of the concern. When plant-increase orders are 
completed, the value of the production is charged to plant 
investment. 

Expense orders, also known as "standing orders," are issued 
for the replacement or repair of buildings, equipment, or tools. 
They are designed to authorize and set in motion all repair 
work — never new installations — and are usually requested by 
the department for which the work is to be done. The cost 
of the labor and the material used is charged direct to the 
departmental or general expense account covering the par- 
ticular kind of expenditure incurred, and not to Work in 
Process. No increase in inventory or in plant results from 
such an order because no assets are being created. 

Charging the Stores Accounts 

When a manufacturing or a plant increase order is com- 
pleted by the finishing of the work called for, it is closed out 
as detailed in later chapters. At that time the controlling 



38 PRINCIPLES OF CONTROL 

work in process account is credited and a stores account or a 
plant investment account is charged. 

Stores accounts are also charged in another way. Any 
kind of material — raw material, supplies, component parts, 
or finished product — may be withdrawn from stores in excess 
of requirements and returned thereto. Since the material has 
been charged out for a specific purpose or order on which it 
cannot be used, the order should be credited with its value. 
To that end it must be returned to stores and the charge 
transferred to the stores account. This is explained in detail 
later. 



CHAPTER IV 

THE STORES RECORD FORM 

Purposes of the Stores Record 

The stores record or ledger is the essential record con- 
cerned with the control of materials; when fully developed it 
becomes the most important single record for regulating both 
production and purchasing. The ancestor of the modern 
record form is the perpetual or continuous inventory card, the 
need for which developed with the needs of storeskeeping and 
the necessity of knowing at any time the amount of each item 
of stores on hand without making a physical count or examina- 
tion. Modern methods have so developed the possibilities of 
the original record that it is now used for purposes of pro- 
duction and accounting. 

The stores organization must exercise the same control 
over materials which a bank considers necessary in the con- 
duct of its business. Whatever material is in the storesrooms 
must be recorded and controlled financially and physically. 
Anything "withdrawn" from stores must be charged to the 
recipient and credited to the "bank," and whatever is received 
into the stores must be included in the inventory accounts 
and thus charged to the stores account and credited to the 
deliverer. Stocks on hand, whether purchased or manufac- 
tured, represent money and on occasion may be a very ready 
method of obtaining money. The record for materials, there- 
fore, is as necessary as a ledger is for cash, and it is just as 
important to know the total value of materials on hand as to 
know the cash balance. 

39 



40 PRINCIPLES OF CONTROL 

Information Furnished by Stores Record 

Though the information recorded on the stores ledger, 
card, or sheet varies for obvious reasons with the conditions 
and requirements of manufacture, the essential data entered 
on the record in a complete system of materials control com- 
prise : 

1. A description of the material. 

2. The factory requirements for each kind of material. 

3. The quantities "on hand," "on order," and "allotted to pro- 

duction." 

4. The quantity to be ordered when the time comes to procure 

a fresh supply either by production or purchase. 

5. The unit price at which the particular item of stores is to 

be priced on requisitions. 

6. The quantity consumed during given periods. 

7. The value of the quantity on hand. 

General Purposes of Information 

The general purposes of this information have been sum- 
marized by J. P. Jordan ^ as follows : 

A standard stock record form takes into consideration all 
features. By this is meant that it is not sufficient to consider 
production control necessities alone, or either cost necessities, 
purchasing or any other individual requirement. 

Likewise, all kinds of material should be considered; Raw 
Materials, Supply Stores, Finished Parts, Sub-assembled Parts, 
and Fully Finished Assembled Parts. 

Thus the stores record enables production or purchasing 
so to be planned as to insure having material on hand exactly 
in the quantities wanted at any time; it enables the factory 
manager to meet the sales department's schedules of delivery; 
it furnishes the only practical method of eliminating errors or 
omissions in ordering and securing materials for stock; it 
helps to reduce to the lowest possible minimum the dead stock 



Service Bulletin of C. E. Knoeppel and Company, Inc. 



THE STORES RECORD FORM 4i 

which cannot be used for Its original purpose; and it guards 
against the production or procurement of an excessive supply 
of a certain kind, thus avoiding the tying up of working cap- 
ital, and needless expenditure for insurance, taxes, and storage 
space. 

As an aid to purchasing, the stores record accumulates 
statistics as to the consumption of materials of every sort 
during the period covered by the life of the record ; it records 
the departments or the purpose for which items have been used 
and the accounts to which they have been charged. When the 
purchasing agent wishes to know if it is opportune to enter 
into a contract for a large quantity of material, he has only 
to refer to the stores records for information concerning past 
consumption and estimates of future requirements and thus 
determine probable future needs. 

As an aid to proper expense and financial control, it fur- 
nishes the exact cost of all material used for production and 
for expense, all material received into stock and on hand. 
Without these details, the inventory values for financial state- 
ments can be secured only by physical inventory. 

Finally, as an aid to the head of the control department 
the stores record should indicate the orders to be filled, the 
quantities on order, and how their completion is to be 
scheduled. 

Methods of Keeping the Record 

There are two ways in which the record can be kept — 
by using loose-leaf books, or loose card files. The loose-leaf 
book is to be preferred in a highly developed system of con- 
trol on account of the greater convenience in using sheets of 
a size large enough to permit the entry thereon of the necessary 
data. Cards of a large size are expensive in the first instance 
and awkward to handle. Under simple conditions of manu- 
facture, however, a simple inventory record card may answer 



42 PRINCIPLES OF CONTROL 

all requirements, in which case they are to be preferred to 
sheets. Entries can be more easily made on cards of a man- 
ageable size than on small loose-leaf sheets which need to be 
clamped together. 

Whether cards or sheets be used, the loose-leaf principle 
is essential for speed in handling, thus cutting down the cost 
of operating the record. Occasionally stock records are kept 
in bound books but this method is so inelastic for indexing 
that there is nothing to recommend it and there are many 
disadvantages in its use. Obviously the amount of space which 
the record of a particular item of stores may require for its 
entries during the life of the book cannot be accurately esti- 
mated to allow for the allotment of the proper number of 
consecutive pages to that item. Furthermore, new materials 
will be stocked from time to time and new sheets or record 
cards must be made out for them. New sheets cannot be 
slipped into the bound book in the alphabetical order of their 
descriptive title or symbol, but must be entered where space 
is available in the book. A cumbersome index is then needed 
for reference purposes. This disadvantage is alone sufficient 
to condemn the use of a bound record. 

Development of Stores Record Form 

The ruling of the record and the amount of information 
it may be designed to record are determined by the system of 
control in use. The study of its development from the simple 
to the relatively complex will furnish a clear understanding 
of the theory governing its operation. 

The simplest type of stores record and the type still used 
in the many simple systems of stores control is the perpetual 
inventory card previously referred to. When any concern 
grows to a size big enough to require a special storage place 
for the materials and supplies used, with an employee to care 
for them and hand them out as required, an inventory must be 



THE STORES RECORD FORM 



43 



kept of the quantities used, on hand, and to be procured when 
wanted, if the material purchases are to be subject to any 
sort of systematic handhng and control. Such a record is 
illustrated in Form 4. 



UNIT 


MATERIAL 


LOCATION 


UNIT VALUE 




DATf 


QUANT*' 
REC'D 


QUANTV 
DELVD. 


BAL.ON 
HAND 


VALUE 
ON HAND 


REMARKS 



















































































































Form 4. Simple Perpetual Invento y with Price and Value Spaces. 
(Size 5 X 3.) 

For each item of stores a card is made out describing in 
its heading the nature of the item, its location in the stores- 
room, the unit of issue, and the unit price. The unit of issue, 
whether in pounds, dozens, feet, cubic measure, or in single 
articles, should be stated on the card, and stores should be 
issued only in units of the stated size — this for the purpose 
of insuring accuracy in pricing, a matter to be explained later. 
Below the heading of the card in the columns shown in the 
illustration are entered the date of each issue, the quantities 
of the item received and delivered, the balance on hand and 
its value. 



Control of Ordering by "Maximum" and "Minimum" Quanti- 
ties 

In the use of the simple record illustrated above, the 
replenishment of stores is left to the judgment of the stores- 



44 PRINCIPLES OF CONTROL 

keeper, who must notify the purchasing department or the 
manufacturing department when a new supply is needed. This 
loose method of relying on judgment instead of experience as 
to when an item of stores and how much of it shall be ordered, 
can be avoided by determining the maximum and minimum 
quantities to be kept on hand, or, as sometimes termed, the 
"minimum ordering quantity" and "ordering point." 

The minimum quantity is the smallest quantity desirable 
to be on hand unless an order is outstanding for a new supply. 
It should be sufficient to last until the new supply arrives ; thus 
the ordering point is reached when the stock sinks to the 
minimum quantity. The maximum quantity is the largest 
quantity expedient to order at one time and desirable to have 
on hand. Under ideal conditions the quantity ordered should 
arrive at the time of the issue of the last unit of the old supply. 
Thus the maximum is the largest quantity which could be 
on hand. 

As such an exact schedule cannot be maintained in practice, 
it is customary to increase the ideal minimum by a margin 
of safety. Thus, if the average consumption of an item is 
I GO units per week and it requires two weeks to obtain a new 
stock, the minimum would be the sum of 200 units plus the 
margin of safety — say of 100 units — or a total of 300 units. 
An order is placed when only 300 units remain in stock or are 
on order. 

Keeping Track of Available Quantity 

Almost as important as the designating of maximum and 
minimum quantities is the record for the storeskeeper's in- 
formation, of the fact that a fresh supply is on order. Unless 
an entry to this effect is made on the record for ready refer- 
ence, it is necessary to review the order files, otherwise mis- 
takes are apt to occur either in failing to order when required 
or in duplicating a request. Columns for recording this data 



THE STORES RECORD FORM 



45 



regarding orders are therefore a desirable addition. They 
usually appear on the left side of the form. Form 5 shows 



UNIT 


MAXIMUM 


MATERIAL 


LOCATION 


MINIMUM 


UNIT VALUE 




ON ORDER 


DATE 


QUANTITY 


BALANCE 

ON 

HAND 


VALUE 

ON 
HAND 


REMARKS 


ORDER NO. 


QUANTITY 


RECEIVED 


DELVD 






































































































































































1 



































Form 5. Simple Stores Record Form with " Ordered " Columns. (Size 6 x 4.) 

a stores record card designed to give this additional informa- 
tion. Since the time to order is indicated on the record itself, 
receipts must be offset against outstanding orders to show 
when an order is completed. Form 6 illustrates a record in 
which the data as to the quantities on order and received is 
shown in some detail. 

The material on order plus the quantity on hand is known 
as the quantity "available" for requirements. The stock of 
a material is never considered as down to minimum so long 
as the quantity available is greater than the minimum point. 

The columnar arrangement is illustrated in Form 7. 

Co-ordinating Requirements and Schedules 

If the only materials information required for production 
management is that covered by records of the quantities of 



46 



PRINCIPLES OF CONTROL 



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THE STORES RECORD FORM 



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48 PRINCIPLES OF CONTROL 

materials and supplies on hand and to be maintained, the forms 
so far described serve the purpose. The data shown on such 
records is all that is called for under simple conditions when 
production is determined by sales requirements as they arise. 
Where, however, production is planned ahead and carried out 
on schedule in accordance with an estimated sales program, it 
is necessary, in order to estimate the requirements for future 
production, to co-ordinate the three factors of labor, equipment, 
and materials. 

Columns for recording "requirements" of each article are 
shown on Form 8. These figures may be estimates of sales 
or of production, actual shipping orders or other reliable and 
pertinent data. Such data will usually be expressed in terms 
of finished product, which must be translated into component 
parts and raw materials and then posted to those records. 

These requirements are paired up with the quantity avail- 
able — due "on order" and "on hand" — to make certain that 
the requirement is covered surely and safely in all respects by 
purchase or by production. If the requirement is not covered, 
an order for more material must be immediately written. 

Appropriating Material 

Occasionally, a still closer control over materials is needed. 
Requirement statistics are usually estimates made considerably 
prior to the time of actual need. When materials are used 
for a number of purposes, it may be of advantage "to reserve" 
or "to appropriate" the quantities needed for specific orders. 
These quantities must be more closely compared with those 
on hand and available than the requirements quantities, for 
the time of actual need is closer. The arrangement of the 
additional columns required is shown on Forms 7 and 8. 

The detail of the stores system required by plants and 
industries varies. Some need a stock record containing all the 
preceding routine, while others will appropriate or reserve only 



THE STORES RECORD FORM 49 

a few important or "key" materials. However large the sheet 
or complicated in appearance, the design must be arranged 
according to the needs. 

"Ordering Quantity" and "Ordering Point" 

In the modern stores record the terms of "maximum" 
and "minimum" have been superseded by the terms "ordering 
quantity" and "ordering point" as the latter more fully rep- 
resent the actual procedure. The ordering quantity is the 
smallest quantity which ordinarily it is economical to procure 
either by purchase or manufacture at any one time. In setting 
the minimum figure for this ordering quantity, the length of 
time required to secure the new stock, the cost of beginning 
production, or the loss of the gains of large-scale purchase 
are matters taken into consideration. The upper limit of the 
quantity is governed by the costs of and convenience of storing 
the materials during the period it lies in the storeroom await- 
ing use. 

The ordering point is the amount which ordinarily would 
be needed to meet average or somewhat more than average 
requirements during the time the new stock is being procured. 
A third quantity known as the "danger point" may also be 
usefully indicated. Unlike the other two terms which apply 
to the available quantity, this term applies to the quantity on 
hand and is the point at which inquiry should be made to see 
that the scheduled delivery time of whatever amount is on 
order is adhered to. 

These quantities are shown in the heading of Form 7. 

"Running Totals" versus "Balances" 

The stock record forms so far shown have columns for 
entering the balance or quantity of an item remaining on 
hand after each withdrawal, and for this reason the record is 
sometimes referred to as the "stores balance sheets." The 



50 PRINCIPLES OP CONTROL 

practical use of such balance columns Is open to question. 
The following is quoted from a service bulletin regarding this 
subject written by J. P. Jordan and sent to the staff of the 
C. E. Knoeppel and Company organization: 

After many tests during actual operation of Stock Records, 
it waa proved that the number of times a "Balance" was actually 
used in comparison to the number of times it zvas computed 
was very small. 

By the same long series of experiments, it was found that 
the extra work necessary to answer questions from all sources 
such as from Purchasing, Production, Sales and other depart- 
ments as to the quantities used in given times was enormous. 

The reason for this was that by the "Balance" method, it 
was necessary each time to add the entries for the period de- 
sired in full detail. By the "Running Total" method, this or 
any figure is available by simply subtracting any two figures. 

Furthermore, as to accuracy — addition is easy; it is there- 
fore far more accurate than subtraction. By the "Running 
Total" method, the clerical work is all addition, except for 
the comparatively few times an actual balance is required. 
And most always, only a glance is required to add the new item 
entry to the running total, and likewise closely enough give the 
observation necessary as to "Balance." 

"Balances" tell only a daily story of a "Net Result," while 
"Running Totals" tell at a glance the same story, and will also 
answer any and all questions instantly as to "Quantity to Date," 
or for a week, month, year, etc. 

There is hardly an item but what the Stock Record clerks 
should watch as to length of time in stock, the speed or move- 
ment, etc. ; and by doing this make the Stock Record a living 
and intensely useful instrument. 

In few systems of materials control is it considered neces- 
sary to show on the stock record the balance of stores on hand. 
Form 8 is a standard form developed for the purpose of 
recording all information that can with advantage be entered 
on the stores ledger and on which no column is provided to 
show balances. 



THE STORES RECORD FORM 



51 



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52 PRINCIPLES OF CONTROL 

Heading of a Stock Record 

Particular attention is called to the heading of Form 8 
in which provision is made for : 

1. A full description of the articles, with its symbol, size, type, 

etc. 

2. The unit, unit weight, and the cubic space it occupies. 

3. Its location in storage — the storesroom and the detailed loca- 

tion therein. 

4. The source of supply, time required to obtain, and its com- 

position. 

5. Its use. 

6. The controlling account in which its value is carried. 

7. Consumption statistics during past periods. 

8. Data of "ordering point" and "ordering quantity," expressed 

as "maximum" and "minimum," with the date such quan- 
tities were set. 

While this completes the discussion of the fully developed 
record form, it should be noted that special cases may demand 
the addition of other information to that already described. 
For instance, in one case known to the writer it is required 
to know for purposes of control the exact location in the 
storesroom of every case of product. In another plant de- 
liveries of all products are analyzed in three columns, headed 
"Consignment Sales," "Cash Sales," and "To Factory Ex- 
pense." The purposes of such columns are evident and the 
necessity for their use can be provided for as required. By a 
study of conditions, it is possible to design special columns to 
fit any special need and occasion. 

Opening a Stores Record 

When it is decided to open a stores record, the first thing 
to do is to take an inventory of the stocks of all materials on 
hand. All items should be listed, standardized, classified, and 
symbolized according to their function as will be explained 
in detail in later chapters. 



THE STORES RECORD FORM 53 

Every material, a stock of which is to be maintained in 
the general, the component parts, and the finished product 
stores, should be represented by a stores ledger card or sheet 
and should be a standard material. All other materials and 
supplies should be included in the by-product stores records. 
The unit cost price or value of the material should be secured 
from the cost department or purchasing department, or by 
estimate as may be necessary. After the details have been 
filled in, the records should be filed alphabetically by class and 
definition, or according to symbol, if it has been decided to 
symbolize the items. Then as soon as the "ordering point" 
and "ordering quantity" are decided upon, the record is ready 
to be put into operation. 

The Handling of Various Classes of Materials 

In a simple storeskeeping system the perpetual inventory 
record is only maintained for such raw materials and supplies 
as are purchased or manufactured for use in production, that 
is, in the shops. In a complete system of materials con- 
trol it is advisable to include in the general stores classi- 
fication those records relating to items used for other purposes 
beside production. 

There need be no difference in the method of maintaining 
the records because of a difference in source or purpose of 
the materials or in their stage of processing into finished 
product. The same forms can be used, sheets can be in- 
dexed according to symbol or definition, balances and entries 
can be posted or recorded, and all the other transactions 
can be carried out in the same way. In Chapters XI and 
XVIII on the "Control of Inventory" and "Graphic Produc- 
tion Control," it will be shown that the same principles and 
methods are applied to the ordering or replenishment of com- 
ponent parts and finished product items as to the ordering of 
general stores. 



54 PRINCIPLES OF CONTROL 

Increasing Inventories 

In factory operation it often becomes necessary to stock 
material which may have been previously specially ordered as 
occasion demanded or which has never been used at all. In 
Chapter XI, "Control of Inventory," it is shown that the 
stores records clerk is responsible for determining the quantity 
of stock to be kept on hand. Any department wishing to in- 
crease that quantity by the procurement of non-stocked ma- 
terial or by an increase in the ordering quantity of material 
already stocked, should furnish reasons for such requests in 
writing. 

When ordering new material for stock it is necessary to 
ascertain whether or not the supply is to be renewed when 
exhausted. If the stock is to be replenished, careful delibera- 
tion and investigation are needed before approving its purchase 
or manufacture. The reason for this is that material already 
on hand can often be made to serve the purpose of the new 
material requested. No new item should be permanently in- 
cluded in the stores lists unless it is to be a standard item and 
stocks in the future are to be ordered without a detailed in- 
vestigation of the purposes of their consumption. Materials 
the stocks of which are not to be replenished will, as a rule, 
soon be withdrawn from stores and the responsibility for their 
cost will be passed to the account receiving the benefit. The 
latter class of material is usually segregated in the stores 
ledger under the heading "Unclassified Stores," while the for- 
mer is in the section devoted to the "classified" items. 

To authorize the stores department to secure a stock of 
new stores, the stores record department should be given an 
"order to stock material" (Form 9) as the authority to secure 
the first stock of new material. The form here illustrated 
gives the description and definition of the material, the initial 
and probable future consumption, together with any other 
details which could aid in determining the proper ordering 



THE STORES RECORD FORM 



55 



point and ordering quantity, and any other data of aid in fill- 
ing the order. The order, whenever the orderer is able to 
furnish them, should be accompanied by drawings or other 



ORDER TO STOCK MATERIAL NO. 



MATERIAL. UNIT MATERIAL. DESCBIPTIOIM 



DETAILED ePeCIFICATIONS OF MATERIAi. 



REMARKS ON CON5UMPTION. STORAGE. ETC. 



PROBASLE CON SUMPTION 



APPROVED 



STANDARCl DEFINITION AND UNIT ASSIONEO 



SYMSOl. ASSIGNED 



OROERIKJC 



APPROVED 



BTOwes o%£onD p» 



Form 9. Order to Stock Material. (Size 6x4.) 

proper specifications. If these cannot be supplied, the stores 
records department should draw up the specifications by refer- 
ence to another department or to any available information 
descriptive of their nature and physical properties. 

Such an order should be signed by an authority in the use 
of this material, such as the head of the engineering depart- 
ment. The procurement of a new item of stores not only in- 
creases the inventory account and may involve a heavy 
expenditure, but when previous experience with the new 
material is lacking there is a chance that some or all of it may 
be wasted through the bad judgment of the ordering authority. 

Upon receipt of an order to stock material, the stores 
records clerk checks the form, determines whether the material 
is to be manufactured or purchased, classifies and symbolizes 



56 



PRINCIPLES OF CONTROL 



it, orders its procurement, has a stores record made out and 
filed in the proper place. The record is now ready for use in 
the same way as any sheet covering material previously stocked. 

The Unclassified Stores Record Sheet 

Although subject to the same general considerations as the 
classified stores, materials not to be reordered when the 
stock is exhausted need not be recorded in as great detail as 
classified materials, although the "ordering point" and "order- 
ing quantity" should be given as "zero." Form lo is an un- 

























MATERIAL 5YMB0L 5 392 5 

nATF ORDER 


MO 
ORDCBED ON REQ. NO. FDR DELIVERY BY 


QUANT/TY 


UNIT 


ST0PE5 SYMBOL AND LOCATION JPECIFICATION NO 


RESERVED FOR 


TITLE AND DESCRIPTION OF MATERIAL 


DATE 


QUANTITY 


Avd. - 


VALUE i ACCOUNT MATERIAL ISSUED TO, NOTES, ETC. | 


RECEIVED 


ISSUED 


BALANCE 









































































































































































































Form lo. Unclassified Stores Record. (Size 8J^ x 53^.) 

classified stores record possessing several advantages. The 
heading is designed to be made out as a duplicate copy of the 
order requisition. The lower half is a somewhat simple stores 
record to be filed by the materials symbol, S (see Chapter VIII) 
and its serial number. As the sheets are serially numbered 
with the symbol in advance, their use automatically classifies 
the record in the files. Since the material is ordered either 
from a specific "order to stock material," it is only necessary 



THE STORES RECORD FORM 57 

to write the charge or use upon the record in one place, thereby 
automatically reserving the incoming stock for that purpose. 
The uses of the remaining columns are the same as for the 
forms explained in the preceding discussion. 

This record covers only material ordered for one specific 
purpose and whose stock is not to be replenished when ex- 
hausted. When the final issuance occurs, the balance on hand 
will become zero, the record of the material automatically be- 
comes dead and is filed by the material symbol in the per- 
manent dead file. 



CHAPTER V 

PRICING THE STORES RECORDS 

Necessity of Accurate Prices 

For the accurate control of materials it is essential that 
the unit value used on stores papers for pricing materials, 
parts, and supplies be accurate. To insure this accuracy care- 
ful attention needs to be given to two matters : the correct 
recording of the total and unit value of the goods received 
into stores ; and care in the clerical work of entering prices on 
stores and cost documents and in extending the price figures. 

The total and unit material values should appear on every 
stores record sheet — the total value to determine the unit value 
and for statistical purposes, the unit value to be used in 
pricing requisitions. 

Though in many storeskeeping systems values are not 
shown on stock records, it is apparent that if a concern wishes 
to know accurate costs of their manufactures, and to draw up 
a monthly profit and loss statement, it cannot do so unless 
the value of the materials consumed is recorded. 

Advantages of Pricing Stores Record 

The arguments for carrying values on stores records are 
that the practice makes for accuracy and economy and is use- 
ful for control and statistical purposes. 

It is the only way to price requisitions at the actual cost 
of the material used. When the price is secured from other 
records such as an invoice or cost sheet, the person pricing 
the requisition cannot be certain that the price applies to the 
material used. Each item of the inventory should be cleared 

58 



PRICING THE STORES RECORDS 59 

out and charged to requisitions at actual cost if the stores 
ledger accounts are to balance with the controlling account in 
the general ledger. 

As every requisition is entered upon a stores record to 
show the delivery of material, if the price for costing purposes 
is secured from another record, a second clerical operation is 
necessary with an increased possibility of error. Thus for 
both accuracy and convenience sake the stores records should 
show the price of each item. 

To secure all the benefits of the pricing of a perpetual 
inventory, the items of stores should be systematically counted 
or otherwise checked in order to verify the records periodically 
and avoid the necessity of a shut-down for inventory taking. 
The cycle of checking each section of the stores ledger, that 
is, every item in a section or classification, should be completed 
at least once a year for the purpose of verifying the agreement 
between the total of all balances in this section and the balance 
of the inventory control account on the general ledger (see 
Chapter III). When the cycle of checking the quantities has 
been completed, and the individual sheets show each item to 
have been verified, on a given date the balances on hand of 
all items are reckoned. These balances are priced and reckoned 
and the total value for the account is computed by means of 
an adding machine. If all invoices and cost sheets chargeable 
to stores have been entered on their detail records in the ledger 
and posted in total to the proper account in the general ledger, 
the figures of the control accounts and the sections of the stores 
ledger should agree. This agreement could not be obtained 
if values were not recorded on the stores records. 

A final advantage of the pricing of the record is the 
possession of all available and useful information in one place, 
affording a complete fund of statistical information regarding 
the items of stores used. For instance, the inspection of the 
stores records shows at a glance such information as quantities 



60 PRINCIPLES OF CONTROL 

purchased and quantities used, speed of use, comparative prices 
of materials, comparative investments, size of issuances, obso- 
lete material, and slow-moving material. The whole story is 
told in one place, with no other records to refer to. 

Recording Values 

In operating the stores records it is unnecessary to extend 
the amount or value of each issue in the "issued" columns. It 
is sufficient to record the price at which material has been 
issued, thus indicating the price entered on the requisition and 
the value of the withdrawal. 

To enter this extension, the stores clerk must stop his post- 
ing to extend the amount or a second reference and posting 
must be made if the extension is made later. 

The above observation does not apply, however, to the 
"received" columns in which the full amount should be entered. 
The value of the goods received should be determined at the 
time the new material becomes part of the existing stock, so 
that if there is any change in the unit price at which the 
requisitions are to be charged, the fact can be noted on the 
stores record. 

To ascertain the unit price of purchased materials, refer- 
ence must be made to the vendor's invoice, to which should 
be added any transportation bills, so as to determine the total 
cost of the material delivered to the storesroom. Until the 
invoice is checked for accuracy, purchased materials should 
not be formally taken into stores by entry upon the records. 
To ascertain the unit price of manufactured parts it is neces- 
sary to refer to the cost records supplied by the cost depart- 
ment. 

The unit price of the manufactured parts taken into stores 
is ascertained from the "report on cost of manufactured ma- 
terial" (Form ii). This report is made out in the cost de- 
partment as soon as the costing is completed, and is forwarded 



PRICING THE STORES RECORDS 



6i 



to the stores records clerk for the entry of unit and total value 
on the stores ledger. 



MATERIAL SYMBOL 



REPORT ON C05T OF 
MANUFACTURED MATERIAL 
DESCRIPTION 



ORDER 5YM50L 



QUANTITY 
ORDERED COMPLETED 



REPORT MADE UP 
BY I DATE 



CO 



ENTERED OM 
ORDER 



ENTERED ON 
5T0RE5 RECORD 



UNIT 



5T0RES CON- 
TROL CHARGED 



IN PROCESS COM 
TROL CREDITED 



Form II. Report on Cost of Manufactured Material. (Size 5 x 3.) 



Components of Material Costs 

The components of the cost of manufactured materials — 
direct labor, material, and burden — and the method and com- 
pilation of the costs, are discussed in Chapter X on cost 
accounting. The cost of purchased material is the invoice price 
plus the inward transportation charges which are often in- 
correctly absorbed as burden. This is discussed in Chap- 
ter XXIV. 

Some concerns attempt to distribute storage charges over 
the material stored, resulting in complex and cumbersome 
clerical effort. These should be included in general overhead, 
except where a storesroom serves one department when its 
expense is a part of that department's burden. 

Materials are frequently received into the storesroom before 
the complete cost is known. Partial deliveries exaggerate this 
situation. The question soon arises, following such a receipt, 
as to whether that material should be entered on the record 



62 PRINCIPLES OP CONTROL 

and then issued before the cost is reckoned. If so, at what 
price should it be issued? A rigid rule that no material can 
be issued until the price has been secured, causes delays in pro- 
duction. On the other hand, no materials should be in the 
storesroom without having been charged to the stores inventory 
account. It is preferable to break the latter rule. 

Two courses of action are open. The requisition may be 
held until the actual price is known or an estimated price may 
be used. If the requisition is held until the value is known, 
the accounting and clerical work is retarded and generally be- 
comes quite confused. As the accounts involved by the par- 
ticular requisition are related to others, a very desirable effect 
is produced. 

The more satisfactory solution is to use the estimated 
cost price. The material being issued in advance of the reckon- 
ing of its cost, should be priced at the last known price or by 
an estimate, and stores credited and the account charged with 
that amount. Any error in the estimate must be adjusted to 
the account receiving the material. 

Predetermining Costs of All Materials 

This difficulty of obtaining promptly the price at which 
items are to be entered on stores records has led to the practice 
of predetermining the price figure before any material or 
manufactured parts are actually received. The department 
placing the order usually determines the estimated price and 
advises the stores records clerk by entering the estimated figure 
on the copy of the purchase or manufacturing order furnished 
to him. 

When materials are purchased, it is a simple matter to 
determine the price if the purchasing agent asks for quotations 
before the purchase order is sent, especially if the material is 
purchased f.o.b. destination. The unit price is then readily 
determined after subtracting trade discounts. Later if the 



PRICING THE STORES RECORDS 63 

price is changed, or if it is not known when the order is 
placed but is learned before the material is received, the pur- 
chasing department notifies the stores records clerk by sending 
him a copy of a supplementary purchase order showing the 
corrected price. Otherwise the price is estimated, as for 
manufactured materials, from records of past prices, esti- 
mates, the judgment of managers or buyers, or any other 
data considered reliable and recent. If sufficient investigation 
is made and the subject is treated as a matter requiring judg- 
ment, the price agreed upon will be so near to the actual as to 
make an adjustment on the stores records seldom worth while. 

As noted, the use of any other than actual cost prices re- 
quires an adjustment to be made somewhere to maintain the 
financial accounts in balance. Frequently, two general ledger 
profits and loss accounts are set up — "Purchase Cost Adjust- 
ment" account, and "Manufacture Cost Adjustment" account. 
The accounts are charged with the actual costs, and credited 
with the estimated amounts at which the material has been 
charged to stores. The balances of the accounts are carried 
into profit and loss periodically. Should a large discrepancy 
arise between actual and estimated costs on any item, the 
difference, as before noted, may be individually adjusted on 
the requisition or stores records to absorb part or all the 
difference. With careful estimating, the total debits and credits 
for a period should balance approximately. 

In estimating the price of items it is well to err on the 
safe side and intentionally to create a credit balance, especially 
when the above accounts are first opened. The results of the 
first few months' operation will reveal the mistakes in pricing 
and future estimates can be more accurately made. 

This procedure is desirable in many businesses but not in 
all. It should be installed only after thorough study of the 
requirements and possibilities of meeting them by the actual 
cost method. 



64 PRINCIPLES OF CONTROL 

Methods of Pricing Requisitions 

There are two much debated methods for pricing requisitions 
withdrawing materials from stores : to use the actual price of 
each lot of material so long as any of that lot is on hand; or 
to use the average price of two or more differently priced lots. 

In many plants both methods are used for pricing because 
the application should differ : ( i ) according to the costs it is 
desired to obtain, and (2) according to the material. 

Regardless of the method of pricing, it is apparent that 
the total material costs of the business as a whole for the 
year will be substantially the same; but for each cost period 
and for each individual job during the year the material costs 
will be somewhat different under the various methods. 

Actual Costs versus Standard Costs 

The method to be adopted depends upon whether the 
business should have: (i) actual costs, or (2) standard costs. 

Actual costs require that a requisition be priced with the 
actual price of material issued. Thus, since the oldest material 
is issued first, the price used is the oldest. This results in con- 
siderable fluctuation in costs from period to period, or between 
similar orders, particularly when market or other conditions 
are causing considerable or abnormal fluctuation in prices. 

Actual costs are said to be more desirable because they are 
real costs and therefore show real profits. Their disadvantage 
is that when production costs are compared with other periods 
or with selling prices, the difference reflects the fluctuation in 
the actual material costs. Selling prices based on actual costs 
are sometimes too high to obtain business or too low to make 
a profit under average conditions. 

Standard Costs 

Because standard costs are not actual costs, does not 
mean that they are inaccurate. Such costs are intended to 



PRICING THE STORES RECORDS 65 

reflect the cost of manufacture under normal or average con- 
ditions, and are especially desirable in businesses manufacturing 
a staple or standard article. Cycles of higher and lower prices 
are soon reflected in higher or lower costs even with standard 
costs. Interpretation of cost statements with the possibility of 
increasing the profit or the necessity of paring the profit, is 
easily made from the knowledge of general business conditions. 

Standard costs furnish a more equable comparison of re- 
sults between periods, between different plants and different 
systems of management. For this reason the trend seems to 
be toward standard costs as evidenced by the movement among 
various trade associations, such as the Foundrymen's and the 
Typographers' Associations, for uniform and standard methods 
of cost accounting. By such means the executive is able to 
compare his costs with the costs of other firms in the same trade, 
thereby deducing whether his organization is as efficient as his 
competitor's and whether he will be able to meet competition 
profitably or not. 

The real ability of his organization is shown by the 
ability of each function to make good in its own activities, that 
is, whether his purchasing department is able to make money 
by contracts at opportune times, whether his control depart- 
ment is able to accomplish the maximum with the smallest 
amount of inventory and of overhead expense, and whether 
his foremen receive a proper quantitative production from the 
employees under their direction. Determining the ability of 
various functions to accomplish their purpose is illustrated 
below in the amount of profits in purchases as shown by pricing 
requisitions at current prices. 

Actual Cost Methods of Pricing Requisitions 

All materials purchased or manufactured especially for a 
certain order, should be priced at actual cost. In special order 
manufacture a large part of the materials used may be specially 



66 



PRINCIPLES OF CONTROL 



secured, in which case to ascertain the profit or loss it is neces- 
sary to cost the materials at actual price. In fact, to use the 
actual cost for pricing all materials other than staples is the 
best practice. 

Where a staple of one general kind is in stock but varies 
slightly in quality, the actual price should be used. For instance, 
a clothing manufacturer has various lots of linings, all of the 
same general grade but varying a little in price. He receives an 
order on which the cost must be favorable. A lining of that 
grade but of the lowest price is selected for the order. The 
requisition for the lot actually used should be priced with that 
lot's cost. 

Frequently staples are priced by using the oldest price 
recorded on the stores record regardless of how many different 
prices there are. The arithmetic of the method is illustrated 
below : 



Receipts 
Jan. 4 500 units at $.50. 
Feb. 15 100 " " .70. 
18 200 " " .60.. 



As material is issued, the 50-cent price of the first receipt is 
used in pricing requisitions so long as any of the 500 units 
received at that price remain in stock. The requisition of 
February 20 calls for 300 units; it is filled by 200 units at 
$.50 (the balance of the first receipt of 500) and 100 units at 
$.70 received on February 15. 

This method of using the oldest price until the quantity 
covered by the price is exhausted, conforms with the policy 
of giving out the oldest stock first to prevent, if possible, 
any deterioration from age, obsolescence, or other cause. 

Actual prices thus reflect actual costs and in turn actual 
profits — and not current or average conditions and cost. 







Deliveries 




250 


Jan. 18 


300 


units 


at $.50.. 


.$150 


70 


Feb. 20 


200 


" 


" .50.. 


. 100 


120 




100 


" 


" .70.. 


• 70 




" 23 


50 


" 


" .60.. 


• 30 


1 


Balance 


150 

r 


, 1 c 


" .60.. 


. 90 



PRICING THE STORES RECORDS 67 

Average Cost Method for Pricing Requisitions 

An average unit cost for pricing requisitions may under 
certain conditions be the best in the case of staple raw materials, 
standard component parts, and finished products. The method 
involves more calculation than the actual price method, and 
hence is more open to error. The figuring of the average price 
involves its recalculation every time any material is received, 
as illustrated below: 

Receipt Jan. 4 500 units at $ .50 $250 



Delivery " 18 300 

Balance 200 

Receipt Feb. 15 100 

Balance 300 

Delivery Feb. 20 300 



•50 150 

.50 100 

.70 70 

566 170 

.566 170 



As material is received, the quantity and total value is 
added to balances of quantity and value on hand, and a new 
average unit price is calculated. If the new material costs more 
than the old, the value of the old material is written up and that 
of the new material is written down, as shown above. 

Average prices tend toward giving standard or average 
costs whose advantages have been described in previous pages. 

Pricing Requisitions at Current Prices 

Materials, while always priced out at cost, are not always 
used in costing at cost prices. Certain industries accumulate 
the speculative profits on purchases where the number of 
major raw materials is not great. The practice is included as 
a part of the standard cost systems of several trade associa- 
tions. 

The practice as applied to the iron and steel industry is 
illustrated as follows : 

Pig iron receipts for charging to stores at the contract 
price per ton. When requisitioned the iron is credited to 
stores at its contract price, and charged to a "Pig Iron Adjust- 
ment" account; at the same time the requisition is priced with 



68 PRINCIPLES OF CONTROL 

the current market price of pig iron, and the adjustment 
account is credited with the amount. If the adjustment 
account shows a credit balance, this represents a profit due to 
the higher market price as compared with the contract price; 
if the account shows a debit balance, there is a corresponding 
loss. 

The advantages of this procedure are threefold : ( i ) it 
furnishes a more standard or uniform cost, and it conforms 
with the principle of basing costs upon current market condi- 
tions; (2) it reflects the efficiency of the purchasing department 
in forecasting the trend of the market and in buying under 
favorable conditions ; (3) it segregates a profit and loss variable 
for independent judgment. 

Inventory Adjustments 

In every storesroom some materials and parts become 
obsolete or deteriorate in quality before being used or prove 
unfit for the purpose for which they were secured. This 
deteriorated material clogs the inventory accounts when allowed 
to remain in stores. It should be disposed of and charged off 
to "Loss from Deterioration of Materials" account as soon as 
possible, so that the inventory accounts may reflect the true 
value of the stock and represent actual working capital. 

Despite every care mistakes are bound to be made from 
time to time in the amount of material given out by stores- 
keepers ; or materials may waste away from evaporation or may 
be lost through pilfering or theft. Discrepancies in consequence 
are revealed when actual count is made and the count is com- 
pared with the quantity called for by the stores record. Some 
storeskeepers write up the unit value of the material on hand 
to cover sufficiently the cost of the shortage. This practice is 
to be discouraged as its effect is to hide the loss or shelter the 
party responsible for the safekeeping of stores Such dis- 
crepancies when discovered should be charged off to a "Loss in 



PRICING THE STORES RECORDS 69 

Inventory Adjustment" account. If the charges to this account 
indicate that the discrepancies are more than should occur in 
the routine of receiving and withdrawing stores, an investiga- 
tion should follow-. 



CHAPTER VI 

OPERATING THE STORES RECORDS 

Reporting Delivery of Materials to Stores 

In previous chapters reference has been made to the de- 
livery of materials and manufactured parts into stores. Such 
deliveries are reported to the control department and entered 
on the stores records through the medium of material re- 
ceived reports (Forms 48 and 82, pages 231, 386, 387). It is 
possible to use one form to report the receipt of both raw ma- 
terial purchases and manufactured parts, but as the forms may 
be made to serve supplementary purposes, it is recommended 
that separate reports be used. 

A purchased material received report should show : 

1. The number of the purchase order to which the material 

applies. 

2. From whom received. 

3. The date received. 

4. The symbol and description of the material. 

5. The quantity received, rejected, and accepted. 

6. The storesroom to which the accepted material has been sent. 

7. The signature of the inspector. 

8. Any other data of interest to the department receiving the 

reports. 

The routine of receiving purchases is described in Part IV 
where Form 82 (pages 386 and 387) illustrates the report made 
out by the receiving department upon receiving any material 
from a vendor on a purchase order. Here it is sufficient to 
explain that one copy of the report is forwarded to the control 
department and is posted to the record in the same way as the 

70 



OPERATING THE STORES RECORDS 71 

"manufactured material received report" to be discussed be- 
low. 

Form 48 (page 231) is a "manufactured material received 
report." As described in Part III, the record is used as a route 
card covering a batch or lot of the material throughout its 
process of manufacture into finished parts. When the parts 
are received in stores, the card is forwarded to the control 
department where the two kinds of received reports are treated 
alike. That is, the quantity received is entered in the "received" 
section of the proper stores ledger card cr sheet after which the 
reports are forwarded to the cost department. 

The total and unit value of the material must be secured as 
soon as possible after receipt, as requisitions must be priced 
as soon as material is issued. The cost of manufactured ma- 
terials is reported by the cost department on Form 11 (page 
61), while purchased materials cost is secured from the pur- 
chase invoices. 

The Stores Requisition 

Material is issued from stores as required, upon presenta- 
tion of a stores requisition (Form 12), which like a 
check drawn upon a bank, is an order for the delivery of the 
amount of stores designated thereon. The information on any 
requisition should include : 

1. The symbol of the account to which the value of the mate- 

rial is to be charged upon issuance. This symbol denotes 
whether it is to be charged to a departmental expense 
account or to a production order. 

2. The quantity of material desired and its unit. 

3. The symbol and description of the material wanted. 

4. The department and its location or the production unit to 

which delivery is to be made. 

5. The time when delivery is to be made. 

6. The approving signature of a duly authorized party and the 

date of approval. 



72 



PRINCIPLES OF CONTROL 



Form 12 Is the ordinary type of stores requisition. While 
this provides for the ordering of only one kind of article, there 
are occasions when it is convenient to order several items of 



STORES SYMBOt. 



MOLD rOR MATERIAL ON OODER NO. CHARGE ACCOUN T 



STORES Rf:QUI5ITI0N 



DATE 
REQUIRED 



APPOOVED 



DATE 
APPROVED 



NOTICE TO REOUISITIONER: USE ONLY SPACE BETWEEN HEAVY LINES 



APPORTIONED 



OEOUCTEO FROM EXTENDED CHECKED 



TAO QECORD 



DELIVERED 



AMOUh4T 



TOTAL VALINE 



Form 12. Stores Requisition, such as used in a very detailed system. 

(Size 6 X 4.) 

the same type or kind on the same requisition, as illustrated by 
the stores requisition copy of a shipping order (Form 13) and 
by Form 49 (page 232). More than one class of material 
should never be ordered on the same requisition. 

The first and most important feature of the requisition is 
its charge symbol, designating the account to which the mate- 
rials or supplies should be charged. The cost department, 
when making up expense and burden statements and production 
cost statements, checks these charges, and the party who has 
signed the requisition should be held responsible for author- 
izing the charge to the account designated thereon. 

The second feature of the requisition is the quantity and 
unit of quantity. There is little likelihood of the quantity 



1 

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OPERATING THE STORES RECORDS 



73 



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74 PRINCIPLES OF CONTROL 

being omitted, but the unit is a detail often overlooked. A 
requisition may be received reading: "5-Midvale High Speed 
Steel i" round" and the party ordering the items wants five 
feet; but if this material is bought by the pound and the stores 
clerk issues it in terms of pounds, the requisitioner will not 
receive what he wants. The unit of issue should be stated when 
possible to avoid the necessity of the storeskeepers having to 
translate the quantity ordered from one unit of measurement 
into another. The persons who ordinarily write the requisi- 
tions should be acquainted with the common units of each 
class of material. 

The description of the material and its symbol are neces- 
sary information for locating readily the proper stores record 
sheet and the material itself. Particular attention should be 
paid to the accuracy of these two items as an incorrect or in- 
sufficient symbol may result in a misunderstanding as to the 
material desired by the requisitioner or in an incorrect entry 
on the stores ledger. When the storeskeeper receives requi- 
sitions calling for "3 screw-drivers such as we got last month," 
"500 sheets of paper," or "2 lbs. of nails," unless he is a tele- 
pathic mind-reader, he cannot be sure of the requisitioner's 
requirements. The description, therefore, should be complete. 
The symbol is both the index to the stores ledger and a safe- 
guard against any misunderstanding as to the kind of material 
wanted. It is a commonly recognized means of identifying 
material. 

In a factory of any size the requisition should not only 
designate the particular department or the production unit to 
which the material is to be delivered, but also the exact loca- 
tion within the department. Definite instructions of this kind 
save confusion in delivery and the time of the requisitioner 
when material is not on hand when wanted. Often the stores 
department is blamed for not supplying the material ordered, 
when it really has delivered it but at an unknown place. 



OPERATING THE STORES RECORDS 75 

In a large organization where the control department is 
responsible for the delivery of materials and parts to depart- 
ments and machines as wanted, the time should be stated on the 
requisition so that the storeskeepers may plan their work ahead. 
The stores department should be given the longest time possible 
to deliver the material which is of course delivered at the con- 
venience of the storeskeepers subject to the requisitioner's 
schedule. 

Each requisition should be countersigned by the proper 
authority before it is accepted. The stores records clerk 
should have a file of the signatures C)f those authorized to 
approve requisitions and of the accounts they are authorized 
to charge. The right of signing requisitions should be dele- 
gated by the general manager or by each department head. No 
requisition should be honored as an order on stores until 
properly approved. 

Routing the Stores Requisitions 

Every stores requisition for material or parts of any kind, 
chargeable to a production order should originate in the pro- 
duction control department. When the requisition is made out, 
the quantity of material needed should be reserved as de- 
scribed in Chapter IV, if that is to be done, following which the 
requisition can be sent to the storesroom. 

Miscellaneous requisitions not originating in the control 
department, amounts for which are not to be appropriated, 
are sent direct to the storeskeeper where they are immediately 
checked. Requisitions i-: supplies chargeable to expense are 
usually filled by immediate delivery. 

Handling the Requisition in the Storesroom 

If a requisition is not correct in form it should not be 
filled, but with a slip explaining the cause of non-delivery as 
shown in Form 14, it should be returned to the originator for 



76 



PRINCIPLES OF CONTROL 



correction. A teller in a bank before he pays a check, care- 
fully scrutinizes the signature of the drawer and the indorser, 



TO DATP 




The attached requisition is returned for 
correction. The items checl<ed are either 
omitted, incomplete or incorrect. 




CHARGE SYMBOL 




MATERIAL SYMBOL 




MATERIAL DESCRIPTION 




MATERIAL NOT STANDARD 




QUANTITY OF MATERIAL WANTED 




UNIT OF MATERIAL WANTED 




PLACE OF DELIVERY 




DELIVERY DATE 




SIGNATURE OF APPROVING AUTHORITY 


W 


hen corrected, the requisition will be honored. 




STORES RECORDS CLERK 



Form 14. Slip to Accompany Requisition Returned 
for Correction. (Size 4x6.) 

the date, the amount, and its other features. A storeskeeper 
should do the same with the stores requisitions. 

If materials are for the particular use of one or two de- 
partments, or if they are of exceptional value, it may be 
desirable to maintain a strict control over their use. Certain 
limits should then be set on the quantity to be requisitioned at 
one time. The same remarks apply to the use of supplies 



OPERATING THE STORES RECORDS 77 

which because of their relatively low cost may be carelessly 
handled and wasted. For instance, a shop may order for a 
month's requirements lOO pounds of waste when lo pounds 
may suffice. Any restrictions on issues should be noted on 
the ledger card or sheet as well as on the bin tag to be explained 
later, and when necessary, the requisitions should be modified 
accordingly. 

When requisitions are not to be filled immediately, they 
should be filed in a tickler file under the date when delivery 
is required. If delivery is considerably in the future and the 
items wanted have yet to be delivered to stores it is sometimes 
advisable to tickle the date about one week or so before the 
expected receipt of the items, to make sure that the material 



Date. 



The following material: symbol. 
Description 



ordered by you for delivery on IS NOT IN STOCK. 

It is covered by order no. . ; 

DELIVERY IS EXPECTED . YOU WILL BE NOTIFIED 

OF ANY CHANGE IN EXPECTED DELIVERY DATE. 



STORES RECORDS DEPARTMENT 



Form 15. Notice that Material Is Not on Hand. (Size 6x4,) 

will be on hand when wanted. In a large organization filling 
many hundreds of requisitions daily, the material should be 
made ready for delivery to the shops on the day before delivery 
is required, as described in Chapter XIV. 



78 PRINCIPLES OF CONTROL 

When a requisition is received for material not on hand — 
but which is on order — Form 15 is used to advise the 
requisitioner of the fact. The wording on this form is self- 
explanatory. 

Posting Requisitions 

When the material has been issued the storesroom forwards 
the requisition to the control department where it is first sorted 
according to symbol number, for posting to the records. After 
the quantity issued is entered in the "delivered" column of the 
stores ledger card or sheet, the requisition is priced, the neces- 
sary extensions are made, and the charges are ready for dis- 
tribution to the account designated on the requisition. If 
stores symbols are not such as designate the stores inventory 
account to be credited the clerk should enter on the requisition 
the symbol of the control account to be credited. 

The Stores Return 

The return to the storesroom of any unused material 
charged to a certain account should always be accompanied by 
a stores return (Form 16, or Form 50, page 232), stating 
the account or order to be credited. When the storeskeeper 
has accepted the material and placed it in its proper bin, the 
stores return or credit is sent to the control department. The 
return is then priced, extended, and distributed in a similar 
way to a requisition but on the opposite side of the accounts 
originally debited and credited. Care should be taken to see 
that the credit price is the same as was charged when the 
material was issued. 

Issuing by Specification 

In certain industries materials or supplies of a certain 
kind are often used on all products or processes, as for example 



OPERATING THE STORES RECORDS 



79 



in the printing trade where ink is employed on every job in 
the pressroom, and in the furniture industry where glue is 
used on almost every article made. In the majority of factories 
the common practice is to handle such materials as supplies 



STORES 


SYMBOL 






ALL EXCESS MATERIAL MUST BE 
RETUQNEO TO STOR&SROOM AC- 
COMPANIED BY THIS FORM'. 


CREDIT ACCOUNT 








STORES RETURN 


1 


DATB SENT 

SENT FROM 1 LOCATION 


ACCEPTED 1 


AMOOWT 


UNIT 


SENT 


MENTION ONLY ONE ITEM ON EACH BETUON 
DESCRIPTION 


QUANTITV 


UNIT 


PRICE UNIT 

? o. 

R 

DELIVERY 




TOTAL VALUE 


tvPITTEN APPROVED OATS 
or DATE BY APPROVED 


MATERIAL RECEIVED E>r 
OR MOVE TAG NO. 


NOTICE TO WPITER : USE ONLY SPACE BETKEEM HEAVY LINES 


INSPECTED 


LOCATION IN 


WEcervEO 


Aooeo To 


EXTENDED 


CHECKED 


STORES 
CHAROED 


ACCOOMT 1 


OY 


OATt 






»v 


OATC. 


TAG 


RECORD 















Form i6. Stores Return. (Size 6 x 4.) 

and to deliver them on requisition as wanted, chargeable to 
burden. When this practice is permitted, the only check on 
waste is an unusual and excessive consumption sufficient to 
attract the attention of the management. A better method of 
control is to determine by experiment the approximate quantity 
of glue or ink needed for each job or process or each day's 
output, and to cover this quantity by a "stores requisition" 
issued and handled in the usual way except that the operating 
department keeps the reserve supply at all times and that the 
requisition does not pass through the storesroom. The control 
department thus has some check on the consumption of the 
material or supply used. 



80 PRINCIPLES OF CONTROL 

Standard Parts Lists Record 

As previously explained, a bill of material similar to the 
"standard parts lists record" (Form 44, page 228), is often 
used instead of a requisition to withdraw materials or manu- 
factured parts from stores. Where goods are made for stock, 
the bill of material or the standard parts record when once 
made up is a permanent record of the materials or parts re- 
quired in the production of a particular order. If more 
material is needed than is designated on the bill of material, 
the extra material can of course be requisitioned according to 
the need. 

The Order Requisition 

When the ordering point is reached for the replenishment 
of an item of stores, either a "purchase order requisition" 
(Form 57, page 287), or a "production order requisition" 
(Form 17) is made out; at the same time, the requisition 
number and the quantity ordered are entered on the proper 
stores ledger record in the "ordered" columns. One form 
could be used for both ordering purposes, but as by 
elaborating the base of each form it is impossible to make it 
serve a secondary purpose in the control department or the 
purchasing department, it is recommended that distinct forms 
be used. 

As it is stated on each stores ledger record whether the 
item is procured by manufacture or purchase, reference to the 
ledger indicates the kind of order requisition required. Each 
order requisition should state the stores symbol, describe the 
material, give its location in the storesroom, the material's 
specification number, the purpose of placing the order, the 
quantity and unit desired, the time wanted, and the account 
to be charged. It is desirable, although not necessary, also 
to state the "ordering point" and the "ordering quantity" for 
classified stores. This information is for the department pro- 



OPERATING THE STORES RECORDS 



8l 



curing the material in case conditions indicate that a change 
in the ordering quantity might be advisable. 

Order requisitions should be made out in duplicate. The 
second copy is retained by the stores records clerk, and the 



TO CONTROL DEPARTMENT 



PLEASE SECURE THE FOLLOWING MATERIAL BY 



PRODUCTIOM ORDER REQUISITION NO. 3471 



DATE WRITTEN. 



REQUISITIONED BY_ 



ORDERING 



WRITTEN BY 



APPROVED BV 



JEOUiSITION. 
DELK 



PRODUCTION ORDER 



Form 17. Production Order Requisition. (Size SJ/^ x 514-) 

first copy after approval by the department head is forwarded 
to the production or purchasing department, as the class of 
order requisitioned may be. The unclassified stores record 
sheet (Form lo, page 56) serves as copy two for all un- 
classified orders. 

The preliminary work preparatory to placing the order is 
begun at once by the department receiving the order requisition. 
After the writing of the order, one copy is sent to the stores 
records clerk for his information and the noting of its order 
number on the record. 

Periodically, at least once each week, the stores records 
clerk should review the records, glancing at the balances and 
their relation to the "ordering point" and the "danger point." 



82 



PRINCIPLES OF CONTROL 



In a large organization much may happen between the date 
of placing an order and the scheduled date for receipt of the 
material. If the danger point is reached, Form i8 should be 



NOTir.F TO THE 

THE SUPPLY ON HAND OF THE FOLLOWING MATERIAL : 


.DEPARTMENT 

SYMBOI 


pF.<^rDlDTIOM 




UA"; PAI 1 FW TO TMF OAMr.FD POINT WHICH Will. 1 AST HAVi 
THE FOLLOWING ORDERS ARE OUTSTANDING 


ORDER DATE 


ORDER SYMBOL 


QUANTITY DUE 


PREVIOUSLY 5CHEDULED 
DELIVERY DATE 


NEW SCHEDULE 
FOR DELIVERY 
































PLEASE LOOK UP IMMEDIATELY AND FILL 


N THE EXPECTED DELIVERY DATE 




2Toaes aecoROS C4.erk 


ADOITIONAL REPORT 








3CM£DUUIKlO CLERK 



Form i8. Notice of " Danger Point." (Size 6 x 4.) 

used. Particularly is this likely to happen when materials are 
not all ordered at certain times strictly in accordance with 
estimated requirements. 



Mechanical Posting of Records 

Though there are several types of calculating machines on 
the market, the mechanical method has little advantage over 
hand-work for the keeping of stock records, except that work 
can be done more neatly and possibly more accurately by 
machine. So far no machine has been devised which can do 
the work connected with entries on a highly developed stores 
ledger any quicker than by hand. 



OPERATING THE STORES RECORDS 



83 



Accuracy of Stores Records 

To be of full value the stores record must be correct in 
both quantities and values. Like any other ledger or record, 
it can be checked to the accuracy of a penny if need be, but 
such exactitude is unnecessary. Reasonable accuracy is all 
that is required. The entries of values are the easiest to check, 
and here accuracy is of great importance. If the posting of 





DAILY RECORD CF BALANCE IN 600K NO. 


CON 


TROL 




i 










DATE 


RECEIPTS 


issues 


BALANCE 


am 


RECEIPTS 


ISSUES 


BALANCE 


DATE 


RECE 


WCE 






















\ 1 






































































1 












































































- - 






- 






— ^ 




— ~ 






1 II 






























































































































1 














































































































r 






































































\ 






























Form ig 


. Daily 


Rec 


;ord of I 


balance. 


(Size 14 


X I 


I-) 





total values issued is omitted, as suggested in the preceding 
chapter, and if balances of quantities and values are not 
reckoned, running totals eliminate the errors which result from 
using balances. Of course, it is possible to make an error 
but it can be easily found. The smaller the number of records 
in a group, the easier it is to locate an error. Sometimes it is 
desirable to group the records in smaller units with a corre- 
sponding control and then to keep a daily balance of that small 
group. This can be done by inserting Form 19 as the first 



84 PRINCIPLES OF CONTROL 

sheet in the group. Such a division of the stores ledger account 
into groups is also valuable for statistical purposes. 

Errors of the Storesroom 

To check the balance of the quantity on hand as shown by 
the stores records with the actual quantity ni the storesroom 
requires a physical count of the latter. The keeping of a tag 
on each bin in the storesroom for recording the stock in that 
bin furnishes one method of checks, as described in Chapter 
XIV. When a tag is filled with entries and the bin has been 
inventoried or when a lot is exhausted, the tag is sent to the 
stores record to be checked with its entries and discrepancies 
traced. Of course the bin tag may be wrong. Entries of de- 
liveries may be made on it in error or may have been omitted, 
or a requisition covering an issue may have been lost, or 
mistakes may have been made in the count of quantities issued. 

Mistakes in descriptions and units of materials cause dis- 
crepancies, or inaccuracies may result from the issuing of 
wrong materials and units. Again, one record may be properly 
made but the other may be wrong. This last error can be 
largely avoided by the use of proper symbols and standard 
descriptions, so that the material is defined to both parties in 
the same terms. Any error must then be due to carelessness. 
It is possible to check such errors by looking up the correspond- 
ing requisitions in the cost department filed by the charge 
account symbols. 

Mistakes are frequently made in the quantity of material 
delivered on requisition. Particularly is this true of items 
issued in large quantities by weight or by count. Automatic 
scales for counting by weight may be out of adjustment, the 
use of "tote boxes" holding specific quantities may lead to 
slight inaccuracies, or a physical count may be incorrect and 
there is no method of check after the material has left the 
storesroom. 



OPERATING THE STORES RECORDS 



85 



Again, employees may confuse stocks of two materials 
merely because they appear alike, resulting in the delivery of 
the wrong thing or in the mixing of stocks. This may happen 
particularly when goods after delivery to a requisitioner are 
returned unused and without a proper return form filled out 
(Form i6). 

A good method of making certain that the stores record is 
accurate and so prevent the purchase or manufacture of ma- 



REQUEST FOR COUNT OF 5TOCK 



BEQUESTED 



COUMTED 



5T0RE5 RECOB05 



Form 20. Request for Count of Stock. (Size 5 x 3 j 

terial when not wanted, is to have the stock on hand inven- 
toried, whenever an order requisition is written. Form 20 is 
used to request such a count. The storesroom report, when 
checked with the quantity which the record shows as being 
on hand, gives greater assurance that the material is actually 
required. 

All discrepancies not adjusted by correcting original 
entries, should be adjusted by writing off the difference to a 
Stores Inventory Adjustment account. If the record is checked 
with an actual inventory from time to time, the balance will 
be corrected periodically and it will be approximately correct 
at all times. Errors can only be eliminated by careful work. 



CHAPTER VII 

CLASSIFICATION AND SYMBOLIZATION 

Business Classification 

Factory buildings may be classified as power houses, 
machine shops, and foundries. Men are classified as engineers, 
draftsmen, managers, bankers, machinists, etc., on the basis 
of the kind of work they do. Materials are classified as raw 
materials, supplies, component parts, or finished products, on 
the basis of their use in the business. Accounts are classified 
according to their use and the nature of the transactions re- 
corded in the account — that is, into expense accounts, inven- 
tory accounts, cash accounts, etc. 

In these few examples it is seen that the classification is 
according to use; that is, on a functional basis. These general 
classes are then subdivided into smaller groups to secure still 
further the control desired over the records. When the group 
classification has proceeded as far as seems necessary, we then 
identify the separate material, man, or activity within each 
classification or division. An employee's name is his usual 
method of identification though in business he may be given 
a number. Such a number is merely a distinguishing mark to 
make it easier to keep the records of his service. 

Every business recognizes the need for classification and 
for some method of indicating that classification by the use of 
identification marks. A manager may first classify his orders 
into purchase orders or sales orders, then number each class 
serially and distinguish one class from the other by prefixing 
an initial P or S before the number as an identification mark. 
The departments of a business may be numbered or identified 

86 



CLASSIFICATION AND SYMBOLIZATION 87 

by letters. The materials may be numbered from i to 10,000, 
Some systems of classification and an abbreviated system for 
indicating it, are found in every business. 

Advantage of a Uniform System 

Though classification is the basis of all systems and records, 
there is not always a definite and intelligently directed effort 
on the part of the management to correlate the various classi- 
fications and methods of identification into a single unified 
system. To illustrate, in a large organization material may be 
given number 1394; an order of a series may bear this number, 
and an employee be allotted this number. When 1394 appears 
what is meant? But if the system were properly devised, each 
person or object or order would be distinctly identified, with 
no danger of confusion. 

Symbols at times "just happen" and are originated as the 
need arises, or as the person using them thinks best. Hence 
haphazard methods of classification and identification come into 
existence and continue to exist. The result is that only those 
who devise and use the symbols understand the marks of the 
various groupings or the history of their origin. Confusion 
and misunderstanding are the result. 

Planning a Classification System 

In any comprehensive system of classification, the group- 
ings of the activities of the business must be carefully planned. 
The first question to be asked is, What groupings will be of 
most practical use in this business? It is useless to classify in 
great detail a large number of products, materials, processes, 
and activities unless the classification will result in saving time 
and clerical work. The maintenance of the classification costs 
money, and the returns secured from it must justify the cost. 

To classify the activities of a business, it is first necessary 
to see where the results of a business are finally expressed. 



88 PRINCIPLES OF CONTROL 

These records are usually in the accounting books. All the 
records, no matter for what purpose maintained, either affect 
or bear some relation to the figures entered in the financial 
accounts. The records of all materials, machines, employees, 
etc., are all summarized in various accounts that make up the 
final book of account — the general ledger. Accordingly, then, 
the system of classification should be based on the accounts kept 
in the general ledger. 

The First Steps in Classification 

After it has been decided what general groups of things 
are to be classified, the first step is to make a complete list of 
all products, materials, men, and machines according to their 
main classification, and then further classify them into sub- 
classes. Probably the primary classifications or groupings will 
have been previously made on a fairly accurate basis — such as 
the grouping of materials as supplies, component parts, and 
finished product. Subsidiary classifications and records may 
also be already in existence, such as inventory lists and opera- 
tion lists, and these groupings will be adhered to. In devising 
the classification scheme, lists or groupings already in exist- 
ence should be compared with the new system of classification 
to make sure that nothing has been omitted. Having grouped 
all items under their proper classification, each item is given a 
distinctive symbol and such description as will distinguish it 
from every other item in the list. This is important, for 
confusion will result if one symbol or description represents 
two or more different items. Finally all items should be so 
symbolized that each has its proper and only place in its own 
group. 

It is not to be expected that the system of classification will 
be functional throughout. Common sense must govern. In 
general the basic and most important classifications may be 
based on the various financial accounts in the general ledger. 



CLASSIFICATION AND SYMBOLIZATION 89 

Within these primary classifications, subdivisions may be 
marked off on the functional basis and the smallest groups may 
be based on the physical nature of the objects. 

Within each group the basis of further classification has 
to be decided anew. For instance a group of articles may be 
used only in making a particular part of a machine product. 
This group may be classified on a functional basis, that is, on 
J:he basis of the use to which the whole group is to be put. But 
within the group the articles might be listed, not by the uses 
which they served in making up that particular product, but 
by the materials of which they are composed, wood, iron, 
brass, etc. 

Thus the first step is to list by classes, divided into groups, 
and each group arranged in order so that every product or 
material which the business uses or has on hand is included 
within the group of its classification. The next step is to 
delete from the list all items which cannot be considered as 
an article of standard use. Standardization is considered in 
detail in Chapter XII. The point here to note is that the classi- 
fication list should include every product, material, account, 
etc., to be used or maintained in the future. 

Symbolization 

It is a little known fact that names are not sufficient for the 
definite identification of one thing among many similar things 
unless the description is long and detailed. This will be evident 
to anyone who tries to identify adequately the various small 
items that form a part of his desk furniture. Without a 
detailed description, names are ambiguous and may mean two, 
three, or a dozen different things. An accurate method of 
providing an identification mark which will make the name 
definite and intelligible is the method of symbolization. 

A name is of course a symbol of an object, but in the 
narrower sense a symbol is defined as a concise representation 



90 PRINCIPLES OF CONTROL 

of a name and a description. While any mark that can be 
rapidly made will fit the definition of a symbol, in practice sym- 
bols are made of letters or numbers or both. Symbolization 
proceeds hand in hand with the final classification. By symboli- 
zation all the elements in the classification can be permanently 
identified and maintained in their order for record keeping. 

The symbol of an object should be so devised that it can 
be recognized without constant reference to a code. Thus if 
S is the symbol for supplies, C for service departments, S for 
shipping, and B material used for binding packages, then 
SCSiB means string used by shipping department for binding 
packages and the symbol may be readily memorized if it is 
remembered that each character suggests its own meaning. 

Use of Symbols Facilitates Clerical Work 

Symbols, in addition to being an aid to ready identifica- 
tion, facilitate the routine of clerical work. When everything 
has been symbolized, the various records can be arranged in 
alphabetical or numerical order by merely referring to the 
symbols. Thus almost every paper on which a symbol is writ- 
ten is already indexed and can be immediately filed by that 
symbol. Stores record sheets are filed by material symbols; 
orders, by the order symbols; machinery record cards, by 
machinery symbols; while inventory accounts, expense ac- 
counts, and cost accounts are arranged in the order of their 
symbols for these classes. It thus becomes a simple matter to 
interpret each symbol as it occurs, as a glance tells the whole 
story. Mistakes are readily noticed, for a symbol that repre- 
sents an impossible combination of letters is easily detected and 
corrected. 

Use of Symbols Maintains Standards 

Symbols are also of aid in the maintenance of standards. 
If the purchasing department, for instance, is authorized to 



CLASSIFICATION AND SYMBOLIZATION 9^ 

purchase according to a definite specification a certain grade of 
paper, it is immaterial, so long as the paper bought meets the 
specification of its physical qualities, whether it is purchased 
from one concern or another, or what is its brand. Employees, 
however, when they handle this paper and see a different name 
applied to it by its manufacturer, a different term of color, or 
a different method of packing from what had been used on the 
paper previously in stock, often are confused, and fail to 
recognize that it is the same kind of paper under a different 
name or under a description differing from the standard de- 
scription. If, then, it be identified by symbol rather than by 
name, the employee at once knows that it is not different in 
quality and intended use from the previous lot. Confusion 
cannot result, standards will not be lowered. Non-standard 
material cannot be included in the standard list and items 
received will be properly described. 

To make the symbols permanent and to prevent their 
degeneration through clerical errors or unauthorized change, 
their determination should be entrusted to the person who has 
charge of methods and systems. As each new standard ma- 
terial or other object is chosen, a new symbol is allotted to it 
so as to classify it in its proper group and to identify it in the 
records of the organization. 

Numerical and Alphabetical Systems 

There are two basic kinds of symbol systems : numerical and 
alphabetical. The first is usually built up like the decimal system 
devised by Dewey for use in indexing libraries. The second 
is based on the letters of the alphabet and is to be preferred to 
the numerical for the reasons already discussed. The ideal 
system, however, is neither a purely numerical nor alphabetical 
system, but a combination of the two. 

Whatever the system, the requirements of a symbol are that 
it be brief, unique, and suggestive. The development of the 



^i PRINCIPLES OF CONTROL 

individual symbol, like the development of the classification 
system, should not be carried beyond the point of utility and 
the saving of clerical labor. 

Brevity in the matter of symbols is easily attained, for any 
symbol is certain to be more brief than the name for which it 
stands. But brevity alone in a symbol is not sufficient, as it 
must not be too short and simple to be efficient. In the use of 
the numerical system we are limited to ten basic classifications, 
unless the symbol is complicated by the use of dots and dashes, 
for the separation of items. This use of signs should be 
avoided as the chance of errors in copying and reading symbols 
is too great. The alphabetical system gives us twenty-three 
characters for classes — I, O, and Q are not used because of 
their similarity to numerals. 

Requirements of Symbols 

Each symbol must be such that there will be no other symbol 
like it. Each item must be represented by one symbol, and 
one symbol must represent only one thing. This quality of 
distinction is a matter of mechanics in drafting the symbol 
system. 

Another requirement is that of suggestiveness, that is, the 
symbol should bear some obvious relation to the words it 
stands for. Thus S readily suggests supplies or sales, and C can 
be seen to bear some relation to service. This quality is some- 
times called "mnemonic." Therefore the use of letters as 
symbols is generally known as the "mnemonic" system. This 
consideration is a strong argument in favor of the alphabetical 
as against the numerical system. 

Not all advantages, however, belong to the mnemonic 
symbols. Many large concerns use numerical symbols because 
of their adaptation to the requirements of mechanical tabulating 
equipment in the compilation of managerial data. This equip- 
ment is designed to accommodate a maximum of ten symbols in 



CLASSIFICATION AND SYMBOLIZATION 

any position, and all symbols in a given position must belong 
to the same class. As it is impossible to develop a practical 
mnemonic symbolization suitable for use with this equipment, 
many concerns now using or which expect to use this equipment 
do not use mnemonic symbols in their installations. 

In the following chapter the mixed system is discussed 
and its advantages explained. Its study will enable the reader 
to devise a strictly numerical system suitable for use on 
mechanical tabulating equipment. 



CHAPTER VIII 

CLASSIFICATION AND SYMBOLIZATION OF 
MATERIALS 

Problem of Classification 

In a small organization the work of classifying and 
symbolizing the stores items is a relatively simple matter 
compared with the problems involved in the classification of the 
inventories of a large organization. The underlying principles 
are, however, the same. Closely related to the principles ex- 
plained in this chapter are the matters discussed in the chapters 
on "Standards and Specifications" (Chapter XII) and "Con- 
trol of Inventory" (Chapter XI). Before stores can be 
classified and symbolized they must be standardized and their 
nature specified; and before the inventory can be controlled 
it is necessary to determine the classifications of the stores 
ledger and other inventory accounts for the purpose of opening 
the necessary controlling accounts in the general ledger. Though 
the discussion of <he function and o[,eration of controlling 
accounts relates more to accounting proper than to the 
specialized accounting involved in materials control, a brief 
description is here given of the general purpose of control 
accounts. 

Function of Control Accounts 

In the accounting for a business of any size, it is customary 
to use the general ledger only for the purpose of showing the 
totals of the various kinds of assets, liabilities, expenses, and 
income, and to cany the detail of these totals in subsidiary 
ledgers. A subsidiary ledger is thus a section removed from the 

94 



SYMBOLIZATION OF MATERIALS 95 

general ledger and controlled by one account therein. As many 
subsidiary ledgers may be opened as there are groups or classes 
of assets, liabilities, etc. For instance, the stores ledger may 
be controlled in the general ledger by the four accounts, General 
Stores, Component Parts Stores, Finished Product Stores, 
and By-Product Stores, necessitating the corresponding divi- 
sion or classification of the accounts in the stores ledger. 

The entries to the stores control accounts are made in total 
at the end of each accounting period. The debits to the accounts 
controlling purchased materials are taken from the purchase or 
voucher register where the vendors' invoices are entered. The 
same invoices are posted on the subsidiary stores ledger on 
receipt of the goods. The debit entries to the manufactured 
parts and finished goods control accounts are made in total at 
the end of each accounting period by summarizing the cost 
records to be explained in this and later chapters. The detail 
of these records is entered in the subsidiary stores ledger as 
parts, and finished goods are delivered to stores. Practically all 
the credits to these accounts are taken from the summaries of 
requisitions which have withdrawn materials from stores. 

Thus the summarized account is termed the controlling 
account, or the "control," because by watching the balance in 
that one account in the general ledger it is possible to control 
the total of the individual accounts in the subsidiary ledger. 
An increase or decrease can be watched to see that the total 
individual balances do not exceed a given sum or ratio. Thus, 
if the Component Parts account in the general ledger is con- 
sidered to show an excessive investment, the individual accounts 
in the supporting stores ledger would be investigated and the 
necessary steps taken to reduce the stock of parts carried. 

Classification of Accounts 

In discussing the principles of classification and symboliza- 
tion it is useful, for purposes of simplicity, to take a specific 



96 PRINCIPLES OF CONTROL 

example from actual business practice. To this end, the system 
of classification used in a printing house engaged in the manu- 
facture of books and periodicals and in doing job work is 
explained in following sections. 

It has already been stated that the base of every classifica- 
tion system should be built up from the accounts. The nature 
of these accounts and why they are divided into expense, assets, 
sales, and liability accounts, and how they are handled, is 
described in detail in the next chapter. 

When preparing to symbolize a classified list it will be well 
to provide a number of sheets of standard letter-size paper 
with the twenty-three letters of the alphabet usable as symbols, 
printed in a single column along the left margin. These sheets 
will be very useful in tabulating in an orderly way the allotment 
of letters to classifications, and checking what letters are as yet 
unassigned. 

In the system of stores symbolization to be here described, 
the letters of the alphabet are used to symbolize the main 
classification, while numerals are used to denote sizes or other 
characteristics impossible to represent effectively by letters. As 
the whole classification is based on the accounts, these are the 
first to be symbolized. 

Reference to Form 21 shows the letters of the alphabet 
allotted to the different classes of accounts. The meaning and 
general purpose of this classification will become clear as the 
explanation is developed. 

Classification of General Stores 

In the business under consideration supplies and materials 
are carried in general stores in great variety. There are 
advertising supplies, such as circulars and folders; office sup- 
plies, such as writing ink, letter paper, and forms; supplies 
used by service departments, such as shipping materials, wrap- 
ping materials and fuel ; miscellaneous supplies used by the 



SYMBOLIZATION OF MATERIALS 



97 



I i 



1 



.a o 



A -Sales and Advertising Departments 

B -Administrative Departments 

C -Service Departments 

D- Productive or Manufacturing Departments i.e., 



DB- Binding Dept. 

DC- Composing Dept. 
mo . ^..^ DF-Foundrv Dept. 
"'r_ll'l..DBr.Pr.ess_D.e,p.t.: 



E-Ottier Profit and Loss Accounts 



F- 

G- 

H- 

J - Products: 

K- [ Worl<-in-Process 

L- Component Parts 

M- Finislied Products 

N- 

P- 

R- 

S- Supplies and Raw Materials General Stores 

T- 

U- By-Products Stores 

V- Special Products 



i.e.. < 



J -Job Work 
K-Book 



P- Periodical 



W- Current Assets 

X- Fixed Investment Assets 



Y- Current Liabilities 

Z- Reserves, Capital, and Surplus 



Form 21. CJiart Showing Classification and Symbolization of Main Accounts 

7 



98 PRINCIPLES OF CONTROL 

production departments, such as type metal, etc. ; tools for 
production work, such as quoins, chases, and tweezers ; building 
equipment and supplies, such as belting and electrical supplies 
used either for replacing worn-out equipment previously in- 
stalled or for new installations. In addition there are many 
kinds of raw materials, such as paper stock in different tints 
and weights for the different kinds of products, as well as 
binding materials and ink. Ink is of such a wide use that it 
cannot be distinctly identified with the production of any one 
class of product, and is classed among the miscellaneous produc- 
tion materials. 

Symbolization of General Stores 

To each one of these classifications of general stores a 
symbol is given. On referring to Form 21 it is seen that the 
letter "S" is the symbol for supplies and raw materials, and 
the letter "D" represents the productive departments. Thus 
the meaning of the symbol SD is supplies used in a productive 
department. Similarly S followed by other letters of the 
alphabet indicate the nature and thus the use of other supplies 
or materials. For instance : 

SA- Supplies used in sales and advertising departments 

SB - Office supplies used in administrative departments 

SC - Service departments' supplies 

SD - Productive departments' supplies (not raw materials) 

SJ - Raw materials for job work only 

SK- " " " books only 

SP - " " " periodicals only 

SR- " " " production of more than one kind of 

product 
ST - Tools 

SV- Miscellaneous material not elsewhere classiried 
SW- Building equipment 

In the same way a subclassification is made of the various 
items of general stores falling in each of these main classes. 



SYMBOLIZATION OF MATERIALS 99 

Thus the raw materials used for SJ, SK, SP, and SR, (see 
above) consist of binding materials, inks, and stock. The 
letter B readily designates binding materials, N represents ink, 
and S symbolizes paper stock. Binding materials include 
cordage, glue, cloth, etc. Printing ink is classified according 
to the color — black (K), blue (B), green (G). Stock includes, 
card stock (C), blotting paper (L), manilas (M), books (K), 
ledgers (L), bonds (B), covers (V). 

The classification of the jobbing stock is carried further, the 
physical properties of the material largely governing the clas- 
sification. Bond papers vary according to the finish — regular 
finish (R), code finish (C), etc. In each of these there are 
several grades — which, omitting the trade names as they are 
meaningless, are numbered — grade i, grade 2, grade 3, etc. 
Each variety of colored paper is distinguished by a letter — 
white (W), blue (B), green (G), straw (S), canary (C), 
brown (R). To designate the size of the paper, numbers are 
used such as 22"X34" indicating area, and 6o# indicating 
the weight in pounds of a ream of a certain size. Thus under- 
standing the meaning of these letters and numbers, every kind 
of paper used in the production of the company's product can 
be given a distinctive description and symbol. The method 
of constructing the symbol requires brief consideration. 

Two Rules for Symbolization 

In the construction of the combined alphabetical and numeri- 
cal system of symbols here described, two rules are observed : 
( I ) The size of the material is usually expressed in numerals 
following the second letter of the classification. (2) The items 
in the last subdivision are always listed in the order of their 
importance or grade and numbered serially. The serial number 
is placed before the last letter of the symbol. Thus a complete 
general stores material symbol always appears as two letters 
followed by one or a series of numerals denoting size, more 



100 PRINCIPLES OF CONTROL 

letters to designate the kind of material, a numeral to designate 
the grade, and a final letter designating a physical characteristic. 
To simplify the construction and recognition of symbols, 
letters and numerals should always refer to the same classifica- 
tion when in the same position. Thus in the symbols 
SJ22X34X40SKR1B and SK22X34X40SKR1B, the characters 
SKRiB always mean paper stock, book, regular finish, grade i, 
blue; while the size, weight, and use are expressed by the 
first group of symbols. The two papers to the uninitiated may 
look exactly alike but there is some difference between them as 
indicated in their symbols. As illustrated above, the first symbol 
refers to paper stock to be used on job work, and the second 
symbol designates stock to be used on book work. 

Classification and Symbolization of Service Department 
Supplies 

The same principles and methods are used to classify and 
symbolize all other materials in stores. To illustrate further 
the methods as applied to general stores, let us classify the SC 
group, (service departments' supplies) before passing to the 
product symbols. Referring to the departmental symbol chart, 
it is seen that the service departments are assigned the base 
symbol C. To each department a separate symbol is allotted: 
CS - Shipping Department, CH - Heat and Power Depart- 
ment, CJ - Janitor Department, CR - Maintenance De- 
partment. The materials these departments consume in their 
daily work are symbolized thus : 

SCJ - Supplies used by janitor's department 
SCH- " " " the power and heat department 

SCR - " " " repair department 

SCS - " " " the shipping department 

SCV - Miscellaneous supplies used by all the service depart- 
ments 

The shipping department makes use of binding, wrapping, 



SYMBOLIZATION OF MATERIALS 10 1 

and packing materials and containers. Binding materials in- 
clude string, cord, rope, and gummed paper tape. How ex- 
tensive must this classification be? If the subdivision just made 
is sufficient to give each item a distinctive description, the 
listing and numbering of kinds can be made at once — string is 
I, cord 2, etc. To illustrate the complete classification and 
symbolization : 

SCSiB - String used by the shipping dept. for binding packages 
2B-Cord " " " 
3B-Rope " " " 

4B - Gummed paper tape used by the shipping department 
for binding packages 

Were it desirable to subdivide the classification further, so 
as to distinguish a variety of colors of string or a number of 
kinds of rope, etc., a separate letter would be given to each 
kind of material and the detailed division would be carried as 
far as it might be convenient to list and number the physical 
characteristic of an item. If items are carried in several sizes; 
it should be noted that the numerals to designate size would 
be placed after the second letter. 

Similar methods of symbolization can be applied to any 
kind of material or supply it is desirable to control. If for 
instance the stock of fuel were of such importance that a close 
watch was required over its value it would be removed from the 
general classification of SCH and symbolized by a suitable 
letter from the basic classification of Form 21. There are 
several available for the purpose, F preferably for its mnemonic 
value : 

SF - Fuel used for heat and power 

SFC- Coals 

SFL-Oil 

The remaining articles in the SCH classification would 
remain in the same position. An inventory account would then 



102 PRINCIPLES OF CONTROL 

be opened on the ledger and symbolized with the letters SF, 
Invoices would be charged to this account, requisitions for fuel 
would be credited to this symbol, and in this way all documents, 
papers, and charges relating to fuel could be readily classified 
and its inventory and use controlled. 

Symbolization of Unclassified Materials 

So far the classification system has covered only the 
standard articles in daily use and which accordingly are kept in 
stock. For obvious reasons, not all supplies and raw materials 
to be consumed in the ordinary conduct of the business can 
be provided for. The secretary may need a rubber stamp with 
his name upon it, or the press department may need a part to 
repair a press. The demand for such articles is special and 
probably would never occur again. Since the articles to be 
procured are not to be reordered on the maximum and mini- 
mum plan, no provision will be made in the permanent classi- 
fications and symbols. However, in the business under 
discussion it is found necessary to symbolize special articles 
temporarily in stores and later to be used for production orders, 
as fine leather specially procured for covering a special copy of 
some book. The symbols for special materials are made up 
by reserving the base symbol SS for this particular classifica- 
tion of purchases, while the individual articles are identified by 
listing them in their chronological order and assigning a serial 
number to each. The number placed between the two S's of 
the base symbol identifies the individual item. 

This division of all articles into two groups — one group 
of those items assigned a permanent place in the classification 
and symbolization, and the other group of those items roughly 
thrown into a miscellaneous classification SS — has led to the 
application of two terms to the groups : classified materials and 
unclassified materials. In other words, these terms are used 
to represent materials stocked and not stocked. 



SYMBOLIZATION OF MATERIALS 103 

Classification and Symbolization of Products 

There remains to be considered the classification and 
symbolization of the products of the concern. These naturally 
fall into three classes: miscellaneous job work, books, and 
periodicals. There is one difficulty in this classification of 
product not met with in the classification of general stores. 
The articles made tend to vary considerably from one period 
to another, resembling in this respect the unclassified general 
stores. 

The first task is to reserve one of the product letters for 
each of the classes of products made. J is suggestives of job 
work, K of book, and P of periodical. The principles of 
classifying products and the methods by which they are applied, 
are exactly the same as those used for classifying general stores. 
The K classification may be taken as representative of the 
three classes. 

All books made are listed and the completed items cut out. 
Since the examples are taken from a printing house doing 
special order manufacturing work to meet their customers' 
demands and not for stock, the standardization work as applied 
to their product is simple — ^there is none. 

The question, "On what basis should product be classified?" 
at once brings up many answers — grade, nature of subject, etc. 
Grade in this case is largely confined to one edition ; the manu- 
facturer is not interested at any time in the nature of the sub- 
ject or its contents, though the customer is. Where the latter 
classifies the books he orders, he probably would use that as the 
basis of his classification. The manufacturer needs control 
as well as identification as a result of the classification, and the 
thing of first importance is the control of each customer's ac- 
count. It is therefore advisable to divide them into classes 
according to customers: the Red Press Company (R), The 
Fisher Co. (E) and so on. 

The books for the Red Press Company must also be dis- 



104 PRINCIPLES OP CONTROL 

tinguished from each other. To do this, the various books are 
listed in the order of their printing and numbered. Since there 
are but two letters in the symbol, the serial number of the book 
is placed between them — thus K65R indicates the 65th book 
made for the Red Press and is the symbol of this finished 
product appearing at the head of the account in the finished 
product stores ledger, on requisitions for this book, on manu- 
facturing orders for the book, on correspondence concerning it, 
and so on. 

This is the base for the symbolization of the parts of the 
products. The sheets of paper until printed, are designated as 
SK material. When in process they take the parts symbols, as 
for K65R, the 65th book for the Red Press. Since the sheets 
in process will be folded into folios, a number of which are 
assembled into the book, the symbol in detail would be K65R1F 
for the first folio, etc. When the book reaches the stage where 
all the folios are assembled, but the cover has not been added, 
this assembly will have the symbol K65RF. 

In the same way the cover symbol can be K65RC, and the 
various assemblies or raw materials from which it is finally 
assembled are given more extended symbols or are known by 
the stores symbols. When the cover and the contents of the 
book become a unit, the distinctive symbols of the cover and the 
inside are dropped and the symbol becomes K65R. Thus with 
each assembly, a digit is dropped from the right-hand end 
of the parts symbols. This case is illustrative of the way 
in which all the product symbols are drawn up, but not every 
group of products lends itself to classification and symboliza- 
tion as easily as books. 

Classification of Special and By-Products 

From time to time special orders are placed in the factory 
for production which cannot be identified with any regular 
product — for instance, a lot of paper boxes. Such an order 



SYMBOLIZATION OF MATERIALS 105 

may be repeated but may have been taken to tide over a slack 
period. The V classification is for that purpose. In the same 
way, as unclassified general stores are symbolized by the in- 
jection of a numeral in the symbol SS, these special products are 
symbolized as ViV, V2V, V3V, etc. 

The study of Form 21 (page 97) shows that U is set aside 
as the base symbol for by-product stores, which, like general 
stores, are both classified and unclassified. Scrap paper when 
baled for sale is a by-product of the printing trade, and is a 
constantly recurring material. A spare or obsolete press or 
cutter is not. This then requires a separate classification. UL 
is used for scrap leather such as scrap belts and bindings ; UP 
for scrap paper ; UT for scrap type metal ; etc. At most there 
are only a few classes. The occasional scrap item is UiU, 
TI2U, U3U, like other unclassified stores. 

Classification and Symbolization of Other Activities 

As already explained, symbols of materials may also be 
used as a means of symbolizing activities relating to these 
materials, such as order number series, operation numbers, etc. 
The opportunities for their use are unlimited. The most 
frequently occurring symbols are from the production order 
number series. A number following the material symbol 
denotes the lot number of that material being processed. A lot 
is the quantity of material which is to be handled or controlled 
as one unit. Thus a total order of 5,000 units might be split 
into five lots of 1,000 each for purposes of accounting or for 
ease in the execution of the order. The symbol K65R3 would 
mean the third lot or edition to be processed of the particular 
book K65R. The use of the term "order" becomes almost 
synonymous with "lot" whenever a whole order is processed as 
one lot. Expense orders are similarly symbolized, using the 
bases A-E, as explained in the next chapter. Thus any symbol 
ending in a numeral and having the base A-V is a lot symbol. 



I06 PRINCIPLES OF CONTROL 

Similarly a number preceding a material symbol denotes an 
operation in the processing of the material symbolized. 
6K65R1F is the sixth operation on material K65R1F. 

Classification and Symbolization of Adjuncts 

Tools, machines, buildings, and building equipment are all 
classified and symbolized by the application of the same 
principles and methods to the base symbol of the asset account. 
For instance, the machinery inventory account might be XM. 
The individual machines are classified according to function, 
and then symbolized by adding characters to XM. When the 
last division of classes has been made, the machines are listed 
in order of size or capacity. XMPiC might symbolize the larg- 
est cylinder press ; XMP2C the next largest ; etc. The base sym- 
bol for buildings might be XB. If there were only one building, 
it and its inventory account would be XB only. 

In the following chapter the classification and symbolization 
of the records as an aid in cost accounting work will be further 
considered as the elementary principles and procedure of cost 
accounting are explained. 



CHAPTER IX 

SYMBOLIZATION OF COST RECORDS 

Function of Cost Accounting 

Only such phases of cost accounting that have to do with 
the collection of cost data relating to the inventories are dis- 
cussed in this book. Such costs are collected in order — 

1. To determine which lines of product are profitable and which 

are not profitable. 

2. To reduce costs through an intelligent study of the elements 

which compose that cost. 

3. To allocate leaks and to stop unnecessary waste in the use 

of materials and of labor. 

4. To compare the efficiency of machines, departments, opera- 

tives, materials, etc., which are working under similar 
conditions. 

5. To compare costs of one period with another. 

6. To compare actual costs with estimated or predetermined 

costs. 

Monthly Reports 

In every business the first desire of the management is to 
know the amount of the profits made during a given period, 
and the operations and transactions that have contributed to 
or reduced them. This information is summarized and 
furnished to the management by the accounting and cost de- 
partments on four managerial reports : the balance sheet, the 
profit and loss statement, the burden statements, and the cost 
statements. While the method of compiling these statements 
belongs to the province of accounting, it is advisable to describe 
here briefly the general content of each of these statements 

107 



I08 PRINCIPLES OF CONTROL 

and the relation of certain items contained therein to 'the 
problems of materials control. 

The Balance Sheet 

The balance sheet is a tabulated summary of the balances 
of the accounts carried on the general ledger. It reports the 
financial condition of the business at the close of the accounting 
period in two equal but financially opposite tabulations of assets 
and liabilities. Assets include current assets, such as accounts 
receivable and cash; the inventory assets under the heads of 
the stores classification ; and the plant assets summarized in as 
many classes as are desired. Liability accounts include the 
current debts : vouchers payable, notes payable, and accrued 
wages; reserves for the depreciation of real estate and other 
plant assets ; and the capital accounts showing the amounts due 
to stockholders and bondholders ; and the surplus account. The 
surplus represents the difference between the assets and liabili- 
ties. Any increase between the surplus of one period and that 
of another represents the profit for the period; any decrease 
constitutes a loss. 

The Profit and Loss Statement 

The profit and loss statement is a detailed analysis of the 
income derived from the sales for the period of each class of 
product, from which figure are deducted the current expendi- 
tures, the remainder representing the profit or loss as the case 
may be. 

In making up the statement the first figure shows the sales, 
from which total is subtracted the cost of the products sold to 
determine the gross profit. From this gross profit the general 
administrative and selling expenses are deducted, leaving the 
net profit or loss for the period. This figure is the increase or 
decrease in the surplus resulting from operations during the 
period, and will appear on the balance sheet, as explained above. 



SYMBOLIZATION OF COST RECORDS IO9 

The Burden and Cost Statements 

Burden statements summarize by purpose the expenditures, 
other than those for production materials and labor, incurred 
by and for the manufacturing departments, so that group and 
individual analyses of all expenditures may be made. By con- 
trolling the individual items, the total burden for the depart- 
ment is controlled. 

The cost statements report the total cost and the unit cost 
of producing each kind of finished product. They are analyzed 
to show the elements or factors of cost which enter into the 
total, i.e., materials, labor, and burden. Where many lines of 
product are manufactured, each line composed of many items, 
it is usually sufficient to report to the management the number 
of units manufactured in each line and the cost of the line as a 
whole unless certain items are particularly important. 

For any managerial statement to be of full value, it should 
tabulate the results of past periods for comparison with 
the current figures, thus affording the management the infor- 
mation needed to control expenditures. 

The Budget 

In addition to the preparation of these essential monthly 
reports, the accounting and cost departments in a large organiza- 
tion should prepare at the beginning of the fiscal year, an 
estimate of the total amount which the management expects to 
expend in carrying out the operating program called for by 
the estimated sales for the year. The preparation of this 
estimate is known as drawing up the budget for the coming 
year. Then as current expenditures are made and recorded they 
are compared with the detailed appropriations shown in the 
budget, for the purpose of noting any tendency to overrun the 
appropriations and disarrange the financing program for the 
year. 

The preparation of the foregoing statements belongs to the 



110 PRINCIPLES OF CONTROL 

field of the accountants. It is the work of the accounting de- 
partment and of the cost department, if a separate organization, 
to record the financial activities of the organization and sum- 
marize them in these managerial reports. 

The Material Accounts 

In recording transactions in the accounts shown on the 
above statements, the inventories play an important part. On 
the balance sheet they are represented by the classification of the 
stores accounts and the work in process account or accounts, 
which last cover the cost of all uncompleted work to date. The 
values shown on the debit side of these accounts have all been 
credited at some time or another to the liability accounts, such 
as wages or accounts payable. 

Some balance sheets present inventory values under several 
classifications, whereas in other instances only the one item 
"Inventory" may represent the whole group of accounts, in 
which case the balance sheet would be supported by a schedule 
of the inventory accounts appearing on the general ledger. 

The Cost Ledgers 

The purpose and nature of control accounts and the use 
of subsidiary ledgers have been explained in the preceding chap- 
ter. In the accounting of a large organization, almost every 
item shown on the balance sheet represents a control account, 
and the number of such accounts with their supporting ledgers 
is limited only by the benefits to be secured from their use. 

Usually when a plant is located at a considerable distance 
from the financial accounting department, the general ledger is 
split. All accounts dealing with the factory are recorded in a 
"cost" ledger or, as sometimes termed, the "factory" ledger 
because it is located at the factory. On Form 22., the accounts 
included are shown as A-V, although E is sometimes retained 
in the general ledger. The general ledger has a "cost ledger" 



SYMBOLIZATION OF COST RECORDS III 

control account, and the cost ledger a "general ledger" account, 
so that both may be in balance at all times. 

The cost or factory ledger, itself a supporting ledger, is sup- 
ported by as many subsidiary ledgers as may be considered 
useful. The factory books are completed by the use of a "cost" 
journal for summarizing these factory transactions, recorded 
on the cost documents (stores requisitions, supplies requisitions, 
time tickets, etc.). Such summarizations furnish the totals and 
details for entry in the cost or factory ledger at the end of the 
cost period, the detail being posted to the subsidiary ledgers as 
the routine progresses. 

Whenever the accounting department and the plant are 
located together or are in close communication, the cost ledger 
can be dispensed with. Instead, such controls as would be in 
the cost ledger are carried in the general ledger, and the sub- 
sidiary ledgers which ordinarily support controls in the cost 
ledger, then support controls in the general ledger. 

The relationship between the main ledger and its supporting 
ledgers is shown in Form 22. While the cost ledger is shown 
in this chart, the following explanations disregard its existence. 

Explanation of the Chart 

As previously explained, the classification of materials is 
primarily based upon the classification of the control accounts. 
The reason for this, as shown on the chart, is that the values in 
the inventory accounts are finally converted into the values 
shown in the accounts which represent the current and plant 
assets. The study of the chart reveals that a cost ledger would 
be supported by the detail accounts in the A-V class. In the 
main or general ledger the current and paid assets are supported 
by those from W-Z. The letters from A-E are set aside as 
the base letters for departmental expense and burden and other 
profit and loss accounts, and those from F-V as the base letters 
for the various stores and work in process inventories. In the 



112 



PRINCIPLES OF CONTROL 



GENERAL or MAIN LEDGER 

A-Z 



PROFIT 4 LOSS, A-E • ASSETS, F-W 

EXPENSE & I CUORENT, W 

BURDEN. A-D , FIXED. X 
MISCELLANEOUS, E I 



LIA5ILITIES,Y-Z 

CURRENT 
RESERVES * 
CAPITAL, Z 



exCEPT E 




Form 22. Chart Representing the Relationship Subsidiary Ledgers 

Bear to General or Main Ledger 

Each block represents one ledger. 



SYMBOLIZATION OF COST RECORDS 113 

main ledger account the letters W and X represent the current 
and fixed assets, while Y and Z are the liabilities. At the end 
of each period the accounts in the class A-E are written off to 
profit and loss or distributed as burden over the month's charges 
to the work in process accounts F-V. 

The merchandise inventory accounts F-V are of two kinds : 
the stores accounts and the work in process accounts, but the 
symbols of both are based upon the same letters. The stores 
controlling accounts represent all the materials which are rep- 
resented in detail by the stores records — one record for each 
material ; while the work in process controlling accounts repre- 
sent the individual production orders in process with their 
attendant cost records. The use and form of these records will 
be explained in the next chapter. These groups of records make 
up the subsidiary ledgers for each of the two classes of 
inventories. 

The expense accounts show the burden incurred by the 
various departments, and it is customary to allot to each de- 
partment of the business a symbol as its identification sign. 
The symbol is then used for the classification of the charges for 
all material, labor, or money used for the benefit of a depart- 
ment. Thus A is used as the base symbol for the distribution 
or sales organization. To it are added other letters to identify 
the various departments of that division. 

AA - Advertising department 

AS - Selling department 

B A - Accounting department 

BC ^ Credit department 

BT - Traffic department 

CC - Cost department 

CH - Heat and power department 

CN - Control department 

CP - Shipping department 

DB - Bindery 

DC - Composing room 

DP -Pressroom 



114 PRINCIPLES OF CONTROL 

The expense or burden charges to each of these departments 
are in their turn classified into individual expense accounts, so 
that the charges for material or labor on the cost records can be 
marked with identifying symbols of the account to which they 
are to be debited. Thus AAA would be the symbol for the 
charge account for all advertising supplies used for the benefit 
of the advertising department (SA in the stores classification 
is the symbol for advertising supplies) ; AAB would be the 
symbol for the account for all stationery and office supplies 
used by the advertising department (SB is the symbol given to 
all office supplies carried in stores) ; and so on, throughout the 
various expense accounts — the symbols of all individual ac- 
counts and for each department being as uniform as possible. 
These expense accounts are maintained during accounting 
periods to secure the detailed information necessary to draw up 
the profit and loss statement and expense and burden statements, 
and to insure the accurate distribution of the burden charges 
to the department or activity responsible for their incurrence. 

Inventory Account Symbols 

In the inventory accounts F-V the situation is slightly dif- 
ferent. Reference to the base classification in the preceding 
chapter shows J, K, and P set aside as the symbols for three 
classes of job, book, and periodical products produced by the 
concern, used as an example. As previously explained, the 
various classes of products are subdivided into groups for a 
more detailed symbol classification — for instance K represents 
the manufacture of books, and the following letter the kind of 
book classified by the customers ; thus KR, symbol of the pro- 
duct, would be used as the base symbol of the accounts, 
representing the inventories of all items carried for the R 
customer — the Red Press. The number of control accounts 
carried depends entirely upon the desire of the management 
for detailed information regarding inventories. In a small 



SYMBOLIZATION OF COST RECORDS 115 

concern one or two of such controls might be ample, whereas 
in an elaborate accounting system the number of controls would 
depend upon the number of classifications of the product. 

Similarly, in controlling the inventory of supplies carried in 
general stores, it might be advisable to operate several sub- 
controls under S — for example, SA for advertising matter, 
or advertising matter and office supplies might be lumped 
together in one account, SA-B, 

Order Symbols 

Symbols have a particularly useful field in classifying 
the records of the production department and in charging pro- 
duction orders. The operation of such orders will be explained 
in a later chapter. Here it should be noted that the use of orders 
is not only a convenience in the planning of production, but 
also furnishes a method of collecting the costs of production. 

Methods of symbolizing orders may vary, but the same 
principles are universally applicable. For purposes of illustra- 
tion the methods used in the printing business discussed in 
the preceding chapter will be further described. 

In this system all manufacturing orders are identified by 
using the stores symbol allotted to the finished product when 
returned to the finished storesroom. All charges incurred in 
manufacture are classified and charged to orders by means of 
their identifying symbols. 

As expense and burden charges are collected by departmental 
account, the symbol or identification of an expense order in 
this system of classification is the proper departmental expense 
account symbol — thus AAF is charged for the upkeep of the 
advertising department's furniture and fixtures. When the 
amount of a particular expense order is expected to be unusually 
large, it may be desirable to further identify the expense order 
in order to segregate the total charge for executive review. 
In this case the regular expense symbol would be followed by 



Il6 PRINCIPLES OF CONTROL 

a serial number (AAF65) the two figures constituting a special 
expense order number. 

Order symbols are used on all stores requisitions, time 
cards, etc., as the means of identifying the order to which 
material and labor used in completing the work is to be charged. 
As the factory papers and documents are received by the cost 
department, the amounts are analyzed and posted to the cost 
sheet of that order, which cost sheet constitutes its work in 
process account. Summaries of these details are posted every 
month, or more often if desired, to the control accounts. 



CHAPTER X 

THE COSTING OF ORDERS 

Methods of Costing Orders 

In the manufacture of the finished product, materials may 
be processed in different ways. They may be transformed 
direct into finished product by mechanical operations performed 
upon them, as in certain branches of the textile trade; or they 
may be put through various processes which change their prop- 
erties, as in the chemical, bleaching, and tanning trades; or 
the two methods may be combined ; or again the materials may 
be first made into finished parts for assembly into the final 
product, as in the mechanical trades. 

These and other variations in methods and conditions of 
production require the adaptation of the method of computing 
costs to the conditions of manufacture. For this purpose there 
are four methods of costing production orders and of deter- 
mining the cost of the finished product or of each of the units 
produced. However, most plants will use all four methods in 
various phases of their manufacture. 

1. The Job or Order Method. By this method all pro- 
duction costs are charged direct to the job or order. The total 
cost of a job or order divided by the units produced, furnishes 
the unit cost of the articles produced. This is the method in 
most manufacturing-to-order plants and is practically always 
used for assembly work. 

2. The Class Cost Method. Sometimes, two or more 
jobs or orders are grouped together, so that the total cost, 
when divided by a common unit, gives the cost for each job. 
For instance, in jobbing foundry practice all orders for castings 

117 



Il8 PRINCIPLES OF CONTROL 

of approximately the same weight, the same metal, and of equal 
difficulty to make, are grouped together, and the total cost of 
molding them is distributed to the jobs or orders according to 
the quantity of each. 

3. The Operation Method, This method can be used 
whenever the total cost of performing an operation upon dis- 
similar parts of a number of orders can be distributed to those 
orders by dividing the total labor and burden by the number of 
units passed through that operation. This gives the cost of each 
unit, whether pieces, pounds, or feet. Sometimes, as in a tire 
plant, practically every operation can be costed in this way and 
a synthetic cost built up. The material cost is always kept 
separate and charged direct to the order. 

4. The Process Method. This method is in some re- 
spects similar to the operation method. The total of all labor, 
burden, and material charges incurred in a series of operations 
forming a process is divided by the units produced to give the 
unit cost of the process. For instance, in an electric light plant, 
the material, labor, and burden charges are accumulated in 
one total and divided by the kilowatts produced, to determine 
the cost per kilowatt. 

Plant increase orders are costed by the first method, but 
manufacturing orders may be costed by any one, or probably 
better by a combination of the four, depending upon the type 
of manufacture and the nature of the product. 

Cost Documents 

The documents or factory papers used for reporting costs 
and charging them to orders are of the several kinds enumer- 
ated below. In addition to their use for the purpose of gather- 
ing costs, these reports serve other important functions, which 
must be performed whether costs are compiled or not. 

I. Time cards, showing how the daily time is to be distributed 
to orders. These cards serve as reports of the amount of 



COSTING OF ORDERS II9 

production completed during the day and for making up 
the pay-roll. 

2. Stores requisitions, showing how the stores are to be charged 

to orders or departments. Requisitions are also the orders 
for the delivery and issuance of materials and the basis for 
the credits to the stores ledger controls. 

3. Stores returns, reporting the return of unused material to 

stores. 

4. Identification and routing cards, reporting to the stores 

records the quantity of manufactured parts and finished 
goods received into stores. 

5. Expense debit slips, showing the expense accounts to which 

purchased supplies and services are to be charged. 

6. Journal vouchers, reporting burden distributions and other 

general ledger distributions. 

Each of these reports must state : 

1. The account to be charged. 

2. The account to be credited. 

3. The nature of the charge or credit. 

4. The exact amount of the transaction. 

Handling the Cost Reports — The Time Cards 

In handling the time cards (Form 51, page 233), they are 
first used to make up the production records. They are then 
sorted by pay-roll numbers for the pay-roll, to determine the 
total earnings and hours of each worker. The individual totals 
of all employees are then added to secure the departmental 
totals. At the same time a distribution by class of labor may 
be made into direct labor and indirect labor, and so on, for 
statistical and control purposes. 

After the pay-roll department has made up its records, the 
time cards are sent to the cost department where they are 
arranged by order symbol and number. The direct labor is 
chargeable to manufacturing orders in detail, and to the Work 
in Process account in total ; the indirect labor is chargeable to 
the expense orders in detail, and in total to the department 



120 PRINCIPLES OF CONTROL 

burden accounts. The grand total of all time cards charged to 
orders must equal the total pay-roll. . This double method of 
sorting and addition, each made in a different department, 
checks the accuracy of the additions and insures that all labor 
charges have been charged to orders of one kind or another. 

As soon as this proof has been secured, the cards are filed 
by order symbol. At the end of each accounting period, the 
expense or standing order cards are removed from the file 
and the total posted to the expense and burden accounts. When 
manufacturing and plant increase orders are completed, these 
time card charges are totaled and the total is entered on the 
cost sheet. Later the order will be journalized to the credit of 
the Work in Process account. The offsetting debits are to 
Finished Product Stores account for the manufacturing orders, 
and to appropriate plant asset accounts for the plant increase 
orders. 

Production order costs or charges are recorded on cost 
sheets such as Form 27 (page 129), kept in what is known as 
"the work in process file," which file constitutes the work in 
process ledger. When an order is completed its cost sheet is 
withdrawn from the work in process file, charges posted, and 
unit and total costs reckoned, and filed permanently away as a 
record of the cost of the finished goods. Thus the work in 
process cost sheets or cost ledger shows the detail of the charges 
debited to the work in process controlling account at the end 
of the cost period. The file of completed cost sheets represents 
the detail of the cost of the finished goods taken into stores 
during the period. 

Charges of various kinds are posted collectively primarily 
to save time and to avoid the entry of detail. If necessary, the 
detail of the summaries can later be analyzed in any desired 
way. 

While time cards are posted collectively at the proper time 
to the order to which they are charged, their totals may be 



COSTING OF ORDERS 121 

posted daily to the control accounts receiving their value — Work 
in Process, etc. If posted daily, the control shows the inventory 
or balance as of the close of business of the last day posted. 
Otherwise the amounts can be accumulated on a proof sheet by 
controls and subcontrols and a monthly total posted at one time. 
An excellent discussion of the handling and disposition of 
cost charges will be found in "Cost Accounting" by J. P. Jordan 
and Gould L. Harris. 

Handling Stores Requisitions 

The method of withdrawing materials from stores, with the 
resulting credit to the stores ledger and charge to the account 
receiving the value, has already been discussed in preceding 
chapters. As stores requisitions are the cost documents which 
give the detail of these charges, they must show the account 
which is to be charged before the requisition is honored. 

The distribution of material charges and credits originating 
from stores requisitions is handled by sorting and adding them 
first according to the symbols of the stores control accounts for 
crediting the stores controls, after which they are arranged by 
symbols of the manufacturing, plant, or expense orders to be 
charged. Here again, this two-way method of sorting serves as 
a check on the accuracy of the totals. At the end of the cost 
period the stores inventory control accounts are credited by 
journal entry with the grand total of all requisitions for that 
class of material, and the controlling work in process accounts 
are charged with stores used on manufacturing or plant orders, 
while the departmental expense and burden accounts are charged 
with the supplies used. If materials symbols which index the 
stores controls do not appear on the requisitions, the stores 
records clerk must note in the proper space on the requisition, 
the account to be credited. 

The adding of the requisitions may be facilitated by the 
use of a comptometer or a listing adding machine. If the lists 



122 



PRINCIPLES OF CONTROL 



are made in proof-sheet form, checking and recording will be 
thereby simplified. As the daily totals of the material requisi- 
tions are secured, the amounts which are to be credited to the 



SUMMARY — MATERIALS USED 

MONTH Of: _ _. ■•»» 


DAY 


c F=5 e: c^ 1 T 1 


GENFQAL COMPONENT 
ItooES '"'-'E'- wots 5TOOES 


COM POME NT 
PftRTS STOPeS 


ETC ETC. 


FINISMEO 1 1 
ETC. PBOOUCTJTOfiTSl 


1 1 






















1 


2 1 
























n 


3 


























1 


4 










1 
















1 


5 








1 
















1 


6 






= 


LJ- — 1 










== J 




1 — U 




























2? 




























23 




























24 




























2S 
































76 






























27 
































28 


































29 


































30 


































31 


































TOWl 








1 






























1 





















Form 23. Summary of Materials Used — Credit. (Size 11 x 83^.) 



various stores control accounts are entered on Form 23, a 
working sheet for accumulating these figures for the month. 

As before noted, the complementary charges to the accounts 
receiving the value are found in a similar way and entered on 
Form 24. Sometimes when the two distributions are made by 
the same clerk, these two forms are combined on one sheet. 

The totals of Form 23 must equal the totals of Form 24, 
thus insuring accuracy. From the totals of the two distribu- 
tions, the journal entries to be explained later are written up 
for crediting the stores controls and charging the controlling 
work in process accounts. The first analysis of the papers is 
usually made by the stores records clerks, and the second by the 
cost department. Thus one department's work checks that of 
the other. Following the completion of the distributions, the 



COSTING OF ORDERS 



123 



requisitions should be filed by "charge symbol" until wanted 
for making up the cost or burden statements. 





5UMMARY — MATERIALS U5ED 

MOWTM OF !<>!► 




CD ^1 ^ 1 r 


DAY 


WORK- IN - 
PPOCCift 


WORK' IN- 

pRoccaa 


WORK -IN - 
PROCESS 


- 


ETC. 




ETC. 


EXPENSE 


1 
































7 
































3 




























4 




























? 






























6 































-TO- 






1 — 1 












1 IT 1 






■ 


21 






























ZZ 






























13 






























24 




























1 


JS 


























1 


76 




























27 




























16 






























»9 






























SO 






























91 






























TOWl 





























































Form 24. Summary of Materials Used — Debit. (Size 11 x 83^.) 

The total of last column must check total material charges on monthly expense and 
burden statements 



Handling the Stores Returns 

Accounting for returned material is the reverse of the pro- 
cedure described above. As previously explained, such de- 
liveries should always be accompanied by a stores return ( Form 
16, page 79), and the amount credited to the party or the 
account returning the stores items should be the same as that 
charged when issued. The return can be priced from the 
stores record if the date of the delivery is known. In case the 
transaction occurred at some unknown time in the past, the cost 
or accounting department may be required to furnish the correct 
figure or an estimated figure may have to be used. 

When customers and departments return stores items which 
have proved defective, the cost of putting the articles into sal- 
able or usable condition should be charged to whatever activity 



124 . PRINCIPLES OF CONTROL 

is responsible for the deficiency. If defective through material 
or workmanship, the cost becomes a charge to the burden ac- 
count of the manufacturing department responsible for the 
defects or to the vendor of the material, if possible. Repairs 
or adjustments made for customers, as a matter of sales policy, 
are sales expenses and should be charged thereto. 

Reporting Deliveries to Stores 

The delivery of purchased materials to stores is reported on 
a purchased materials received report. The nature of this form 
and its routing are to be discussed in Chapters XXVI and 
XXVII, as it does not enter into the cost accounting work. It 
is sufficient here to say that the stores accounts are charged and 
vouchers payable are credited through the general books of 
accounts. 

Manufactured parts received reports are forwarded to the 
control department for entry on the stores records. Such re- 
ports may take a number of different forms. Some firms use 
the same report as for purchased material. Others use a some- 
what similar but simpler form. The route card (Form 48, page 
231), illustrates a simple but adequate method for most plants 
to report deliveries into stores. 

A manufactured parts received report should show the de- 
partment last working on the order, the symbol and description 
of the order, the quantity sent and accepted, and the signature 
of the inspector. The route card mentioned above accompanies 
the material from its beginning to its completion and delivery 
to the storesroom as manufactured parts or finished goods. 

When orders have been completed and the costs reckoned, 
as discussed later in this chapter, the unit cost is reported to the 
stores records clerk by means of Form 11 (page 61) for entry 
on the ledger and for pricing requisitions as the parts are 
issued. When the plant is operated on a "to order" basis, 
formal finished product stock records may not be in operation, 



COSTING OF ORDERS 1 25 

in which case the cost department usually prices requisitions and 
performs all operations of crediting finished product stores and 
charging cost of sales. The cost department also tabulates the 
value of all manufacturing orders to make the credits to Work 
in Process and charges to Component Parts Stores or Finished 
Products Stores, as explained previously. 

Journal Entries 

The transfer of charges or credits from one general ledger 
account to another is done by journal entry showing the 
amounts to be posted to the appropriate control and the detail 
accounts in the general and the supporting ledgers. Such 
journal entries cover the summarization of time cards, stores 
requisitions, stores returns and manufactured parts received 
reports, thus recording the various transfers of material values 
from stores accounts to work in process accounts, and vice 
versa. In addition, journal entries are used for the distribution 
of expense charges to work in process and the department bur- 
den accounts, and for other miscellaneous transfers. 

A journal entry consists of a tabulation of the accounts and 
the amounts to be debited and credited, with an explanation of 
the reason for making the transfers, as here illustrated : 

J. E. No. 943 

Jan. 31 KR - Component Parts Stores $1,000.00 

To KR - Work in Process $1,000.00 

K65RF2 $700.00 

K71RF7 300.00 

Orders completed during the month. 

The first symbol indicates the Component Parts Stores ac- 
count to be debited; the second symbol above designates the 
Work in Process account to be credited ; the symbols below in- 
dicate that the detail amounts are from certain supporting 
work in process cost sheets. The positions of the amounts 
designate whether they refer to general ledger or to supporting 



126 



PRINCIPLES OF CONTROL 



ledger accounts. Should the details be of considerable length it 
would involve too much clerical work to list all of them in the 
journal entry, and reference would be made to the working 
paper, giving the details. So long as the details appear some- 
where in permanent form, they need not be given in the journal 
entry. When the summarized charges or credits to the control 
accounts are posted, the detail entries must also be made before 
the transfer can be considered as finished. 

Journals, like ledgers and other records, can be either bound 
or loose-leaf books. The loose-leaf journal method permits 
entries to be prepared separately and by several departments, 
and then arranged in chronological order in a binder. Such a 











.innQNii rwTOY voiirMFQ Nn 






ISZ 




OETAILJ 


V 


conrnOL s 


0«,T 


CREDIT 


DCaiT 


CREDIT 






























































WaiTTEH BV 


APPROVE O BY 


Cf^TERCD Br 



Form 25. Journal Voucher. (Size 1 1 x 83^.) 



journal is illustrated by the journal voucher (Form 25). In 
the upper right-hand corner is a space JEV — for entry of the 
serial index number of the voucher. Just below is written the 
date on which the transfer is made. The individual loose-leaf 
voucher is written out like an ordinary journal entry, with the 



COSTING OF ORDERS 



127 



equal debit and credit and full explanation. This form pro- 
vides columns for showing detailed accounts as well as con- 
trol accounts, if the details are not too lengthy. 

Handling Expense Debit Slips 

As will be explained in detail later, the values of purchased 
material to be charged to the stores ledger control accounts are 
secured through the voucher register (Form 88, page 396) 
ruled with columns for distributing the charges. One column 
is for the entry of amounts chargeable to the stores materials 
accounts. The credits in the voucher register are usually to 
"vouchers payable." Another distribution column in the 



f ORDEQ NUMBER 




INVOICE DATE OR NUMBER 


VOUCHER NUMBER 


DATE OF CHAOOE 


EXPENSE LEDGER 5LIP 


1 M M M 

ACCOUNT NUM6EB 


1 1 1 

CBEDIT ACCT. 


Jell 


1 1 1 1 1 1 
AMOUNT 


OPR. 


QUANTITY 


DESCRIPTION 


PRICE 


UNIT 


AMOUNT 1 






























































CftEOlT ACCT. 


DEBIT ACCT. 


AMOUNT 


REMARKS TOTAL 







Form 26. Expense Ledger Slip. (Size 7Hx334-) 



voucher register may be used for entering purchase amounts 
chargeable to expense and burden accounts and headed, for 
example, "Expense Ledger Accounts, A-D." For each entry 
in this column, an expense ledger slip (Form 26) is made out 
and passed to the cost department, where they are filed by 
account number like time cards and stores requisitions until 
the end of the month when they are totaled for the expense 
and burden statements. 



128 PRINCIPLES OF CONTROL 

Making Up Expense and Burden Statements 

For purposes of analysis and control, the totals of expense 
and burden for each department are listed on monthly state- 
ments to show the actual amount of each kind of expense and 
burden incurred in each department. For comparative pur- 
poses, the amounts for the previous year should be shown in a 
parallel column. These monthly expense and burden state- 
ments are made up as soon as possible after the last cost re- 
ports for the month have been received and handled as 
described above. Then reports of all kinds are totaled by 
account symbols and listed. Some departments' expenses are 
to be apportioned among other departments. Accordingly, 
journal vouchers are made out and the proper postings made. 

Tabulating Production Order Costs 

It has been stated that production order costs are figured 
on the work in process cost sheets, and such sheets become 
finished goods cost sheets as soon as orders are reported as 
completed. Form 27 represents such a loose-leaf cost sheet 
or tabulation. This record sometimes serves as a notification 
from the control department to the cost department of the 
work to be done, and thus takes the place of a production 
order because it shows : 

1. The order symbol 

2. The quantity ordered 

3. The date of the order 

4. The ordered material's symbol 

5. The ordered material's description 

6. "^he operations on the material 

The form here shown (Form 27) is used for the tabulation 
of ordinary operation and assembly costs. A description of 
the method of making entries on it is unnecessary, except that 
the total amount for each operation and each kind of material 
is posted rather than each detail charge. 



COSTING OF ORDERS 



129 



COST OR ESTIMATE SHEET 

NAME OF ARTICLE ORDER NO. 


ADDITIONAL DESCRIPTION DATE 






NAME AND DESCRIPTION OF MATERIAL 


UNIT 


?f^N,Tj 


UNIT COST 


TOTAL COST 1 
















































































































• 






























TOTAL COST OF MATERIAL 














DIRECT LABOR 


SUMMARY 1 


NO. 


OPERATION 


AMOUNT ' 


HOURS 


OJjl>0|KJ 


amoukTt 


KIND OF COST 


TOTAL COST 


COST PER UNIT | 


















MATERIAL 


























Direct labor 


























BURDEN 


























TOTAL PLANT COST 


























ADMINISTRATIVE COST 


























TOTAL 


























SELLING COST 


























TOTAL 


























• % PROFIT 


























SELLING PRICE -ESTIMATE 


























- QUOTED 


























OROCO l-tlSXO«Y 1 




OA-re 






















ORDERED 
























STAC?TEO 
























COMPLETED 
























CO»-l^lLATIO»a COI-IOtLEO 




TOTAL 














rtK'O COSTS RSRORTeO 

^S' TO srroPtES 
6V KEcoaos ev 


REMARKS 













Form 27. Cost or Estimate Sheet. (Size83^xll. 



The Work in Process Control Accounts 

For the sake of simpHcity it has so far been assumed that 
all production orders are charged to one Work in Process 



130 PRINCIPLES OF CONTROL 

account. It is often necessary for the purpose of analysis and 
control to divide Work in Process into three accounts — one 
each for Material in Process, Direct Labor in Process, and 
Burden in Process — and in very large plants to have separate 
accounts for each department. The total of the divided work 
in process accounts should equal the total of the one account 
if one only were used. 

The Burden in Process account of a divided work in pro- 
cess account requires special mention. In using predetermined 
burden rates for computing costs a rate is reckoned which, 
when used over a period of a year, is expected approximately 
to equal the amount of actual burden which it is expected will 
be incurred during the year. When a furnace must be torn 
down and relined, for instance, the cost should be distributed 
over its period of life. In accounting for this burden, it is 
customary to use two burden accounts for each department — 
the "Burden Actual" and the "Burden Credit" accounts. To 
the first is charged all burden as it is accumulated, that is, the 
actual burden costs. To the second is credited all burden 
distributed to production orders in proportion to the direct 
labor incurred thereon for the period at the predetermined 
rate. By comparing the amounts of the two accounts, it is 
possible at all times to see whether the predetermined rate is 
large enough to absorb all the actual burden incurred, or 
whether the estimated burden charge is too great and is pen- 
alizing the jobs done. The difference between actual and pre- 
determined burden is shown on the monthly profit and loss 
statement. Among other advantages, the use of this predeter- 
mined burden rate permits the compilation of costs before the 
actual burden rate for the period is determined, and permits 
costs to be more nearly standard or uniform. 

This completes the brief description of manufacture up 
to the point where the deliveries therefrom are made to the 
storesroom. 



CHAPTER XI 

CONTROL OF INVENTORY 

Effect of Policy on Inventory 

We have seen that the inventories comprise two classes of 
accounts — the stores accounts and the work in process accounts 
— shown in the balance sheet in various ways, as the inventories 
of general stores, worked materials stores, finished product 
stores, by-product stores, and work in process for the respec- 
tive classifications. The management is interested in the total 
values of the inventories as a guide in shaping future financial 
policy, for these totals, with those of the plant assets, represent 
most of the invested capital of the business. If the concern 
is in need of cash, the reduction of the inventories by sale or 
by decreasing production and purchases is a method of supply- 
ing the need. If the concern has a surplus of ready money, it 
may be practical to increase the inventories and thus save 
money by the purchase or the production of materials in ad- 
vance of need. 

In the control of the inventory the result of any changes 
in policy should be carefully kept in mind. To lower the 
inventory of materials on hand and ''in process" will probably 
improve the immediate financial position of a concern ; but the 
greater the quantity of stores within reasonable limits, the bet- 
ter will the stores department be able to supply the needs of 
the consuming departments. From the point of view of 
quantity the needs of the consuming departments should first 
be considered, while the limitations of good finance govern the 
uppermost level to which the value of the inventory should 
go. The financial position of a concern suffers as soon as 

131 



132 PRINCIPLES OF CONTROL 

the inventory amounts become too high, and it is to guard 
against this condition that a control of the upper limit of the 
amount is desired. The useless, wasteful, and unnecessary 
outlay of cash for materials not needed can be avoided by 
regulating the total values. 

Inventory Carrying Charges 

The carrying charges for all materials in stock, which 
charges include insurance, taxes, depreciation, rent, and manual 
and clerical labor, plus the interest to be earned on the invest- 
ment, probably amount to from io% to 20% per annum of 
the value of the stores. For instance, a certain material cost- 
ing $200 may be held in inventory for six months before being 
used and its carrying charges may amount to $20, yet the 
expense must be absorbed as overhead and not as an increase 
in the cost of the material. Strictly speaking, that material at 
the end of six months has cost $220 — but is still worth only 
$200. These charges should for strict accuracy be included 
as part of the costs of the materials used, but the detailed 
accounting necessary to do this makes it impracticable. 

If the inventory of certain materials is allowed to increase 
or even to remain stationary, there is also the possibility that 
the material will suffer damage or will deteriorate to a value 
far under its cost; or it may become entirely obsolete and not 
usable for the purpose for which procured. There is also the 
possibility of the market falling in price at the very time the 
stocks are at their highest, and the true value of whatever is 
on hand is decreased accordingly. Hence, the management in 
deciding upon the maximum quantity must give some thought 
to carrying costs and the chances of loss of stock. Charges 
increase proportionately with the quantity stored, and the length 
of time the item is in stock and may quickly overcome the 
advantages of buying or of manufacturing solely for the sake 



CONTROL OF INVENTORY 133 

of a low unit price. An accurate estimate, however, -can easily 
be made and should always be made when considering the 
carrying of materials in stores. This estimate should be fig- 
ured as a per cent of the value of the material. 

It is not to be supposed that every one of these factors 
will be minutely determined for every material every time an 
order is to be requisitioned, but if the subordinate to whom 
this matter is entrusted, is given the proper records and sta- 
tistics and is kept informed of current general conditions, it 
quickly becomes second nature to determine the expediency of 
placing orders. The work becomes routine, takes but little 
time, and each correct judgment insures accuracy in succeed- 
ing estimates. 

The Consideration of Quantity 

Manufacturing and sales policy govern the lowest limit 
to which the inventory should be allowed to drop. That limit 
represents the consumption during the time required to obtain 
a new supply. The sales department requires the quantities in 
finished product storesrooms to be such as will meet their 
schedules. There are the same advantages of lower unit costs 
in large-scale production as in large-scale purchase, and the 
quantity put in process should not be allowed to drop below 
the point where such advantages can be secured. Finally, the 
manufacture of the components in process should be so co- 
ordinated that they will be finished on time when required for 
final assembly operations. In this matter there is often a lack 
of balance, resulting either in an oversupply of items or parts 
which will not be required for some time, or in holding up 
subsequent operations of assembly. The deal is, of course, 
the greatest amount of business possible with the least amount 
of capital invested per unit of product manufactured over a 
given period. 



134 PRINCIPLES OF CONTROL 

Control Procedure 

The specific methods and forms to be used to effect the 
control of inventory will be described later. Here it is neces- 
sary to emphasize the need of a well-organized and definite 
method of procedure to carry out the work. A mere decision 
of the management does not accomplish this control any more 
than a decision that sales must increase brings more orders. 
There must be a system of applying the decision in detail to 
the separate groups of stores and then to the single items. 
The method must be simple in plan and in operation so that all 
may comprehend it. At the same time it must be thorough and 
uniform and if it is to be inexpensive in operation it must pro- 
vide for handling an expansion or contraction of stores with 
ease and speed. Finally it is of the highest importance in 
controlling inventories that the inventory figures presented in 
the monthly balance sheet be correct, otherwise any policies 
decided upon will be inconsistent with the actual conditions. 
Accordingly, then, the stores department must be clerically up 
to date and the records accurate. 

The controls of the stores and work in process accounts 
should show the true condition of the stores inventories and 
the work in process. Therefore the materials ready to be 
turned into stores should be promptly forwarded by the pro- 
duction departments to the storesroom, so that work in process 
accounts may represent only materials actually in process. 

Determination of Ordering Points 

The management exercises control over the inventories only 
to the extent of indicating the maximum total values of the 
different classifications to be maintained for a given period. 
This decision must of course be based on general business con- 
ditions, the financial status of the concern, unfilled sales orders, 
turnover, and any other factors which bear upon manufactur- 
ing policy. When the market is falling and a period of re- 



CONTROL OF INVENTORY 135 

trenchment has set in, inventories must be reduced to the lowest 
Hmits of safety and any surplus converted into cash as soon as 
possible. When the market is rising and a period of expansion 
and increase in volume of business is looked for, heavy con- 
tracts are naturally placed for the purchase of materials. In 
either case, however, the figures to which the totals are to be 
reduced or raised should be definitely determined. 

After the amounts of the controlling accounts have been 
limited and apportioned to their subcontrols, the work of con- 
trolling the separate items is left to a subordinate. Certain 
instructions for his direction should be drawn up, such as 
the maximum period during which stock is to be kept on hand 
and the minimum value of the single order to be placed. Be- 
cause the work of ordering new supplies is given to a sub- 
ordinate, it is not unimportant. 

The routine of ordering materials included in the inven- 
tories as explained in Chapter VI, is governed by the 
ordering point and economic ordering quantity — data which 
are entered on the stores record. A mistake of judgment in 
fixing too low an ordering point may result in a loss, through 
delays in the manufacturing departments, out of proportion to 
the small economy effected. An "economic ordering quantity" 
is too low when it increases the unit cost unnecessarily. As 
previously stated, the quantity making up the ordering point 
should be the total of the amount required for average or 
expected consumption during the time ordinarily taken to 
secure a new supply plus a margin of safety. Errors of cal- 
culation in requirements, unavoidable delays in deliveries, in- 
creases in consumption — all these factors must be covered by 
the margin of safety. 

Determination of Minimum Ordering Quantity 

The minimum ordering quantity should be the minimum 
quantity which can be economically purchased or manufactured 



136 PRINCIPLES OF CONTROL 

at one time and then stored until wanted. To determine this 
requires a review of all the factors of stores handling expenses 
which influence the economic cost, as well as the purchasing 
or manufacturing expense. In practice the upper limit of the 
ordering quantity is set by the sales or consumption schedule. 

The amount which the stores records clerk requests on an 
order requisition and the balance available at the time the 
requisition is signed, are not necessarily the same as the "order- 
ing quantity" and "ordering point" entered on the stores record. 
These quantities are intended to serve as guides to the form- 
ing of a judgment on each requisition. Conditions are chang- 
ing from day to day and the signature of the head of the 
stores record department should not be affixed to an order 
requisition until each requisition has been studied and the con- 
ditions affecting the order have been reviewed. 

Economic Minimum of Manufacturing Cost 

In determining the quantities of materials to be purchased 
no special problems arise, as their cost is given in the quota- 
tions of sellers, to be discussed in a later chapter. In deter- 
mining the minimum quantity of parts to be made, the control 
department has to consult the manufacturing and estimating 
departments. The initial cost is largely governed by the time 
required for preparation and for setting up the machines, and 
this cost is the most important consideration in determining 
the "minimum quantity" to be put into process. Usually the 
costs of materials and labor vary directly with the number of 
units completed. For instance, in making a part for a machine 
tool it might require two hours to set up a lathe for turning 
that part, and if only one part is ordered, the unit cost is of 
course proportionately high. The clerical work of placing the 
order probably costs over $i in each case. Though as a rule the 
more parts ordered, the smaller will be the unit cost of manu- 
facture, this unit cost soon reaches an economic minimum. 



CONTROL OF INVENTORY 137 

Graphing the Consumption 

As an aid to the forming of a correct judgment, when an 
it^m of stores reaches the "ordering point," its consumption 
should be reviewed to see if a change has been made expedient 
by changing conditions. Form 28 is designed to make such a 
review easy. It will be noted that the lower part of the form 
graphically presents the record of consumption for a period 
of two years. Whenever the stock falls to the ordering point, 
one of the cards is made out to show the consumption to date. 
From left to right the lines represent the months, while from 
the bottom to the top, the spaces are for the quantities con- 
sumed, using whatever scale best suits the case. The spaces 
above the graph are filled in by the stores records clerk and by a 
person familiar with the securing of the material, such as a 
member of the purchasing or the production control department. 

When the executive of the control department responsible 
for the "ordering quantities" and "points" studies this chart, 
he is able to tell at a glance the trend of the consumption for 
the period charted. This information, with his general and 
his specific information of future manufacturing requirements, 
enables him to make any needed changes in the ordering point 
and ordering quantity. If a change is made, the new quan- 
tities are placed on the stores record and the proper action 
taken while the chart is filed by its symbol until the ordering 
point is again reached. Then the consumption curve and other 
data are brought up to date and the card is again ready for 
the decision of the reviewer. 

The expense of maintaining these graphs is very slight. 
The cards can be used again and again and little time is needed 
to bring them to date. The system has been used at a weekly 
cost of about $30 in a stores organization handling over 
2Q,ooo items inventorying over $400,000. Inventories were 
cut $100,000, saving at least $10,000 in carrying charges alone 
— and the operating cost was $1,500 a year. 



138 



PRINCIPLES OF CONTROL 



STORES 5YMBOL 

APPROXIMATE S 
UNIT UNIT PRICE ■ 


DESCRIPTION 




ON HAND 
















ON ORDER 
















APPORT 
















DEFICIT 

NO. AVAILABLE 

IF ANY 
















DATE 
















FILLED IN 
6Y 
















TIME 
REQUIRED 
TO OBTAIN 
















MINIMUM 
ECONOM IC 
ORDERING 

QUANTITY 
















DATE 
















FILLED IN 
BY 
















JFMAMJJASON 


■> 


J F M. A M U g. A ,S <? 'J o\ 






































■ 


























































































































































































































































































































































































































































IZ3-466709I0III2 123-4 56789 10 11 J 


ORDERING 
OUANTITY 
















ORDERING 
POINT 
















DATE 
















SET BY 
















_ 



Form 28. Graphic Record of Consumption (white). (Size 5x8.) 



CONTROL OP INVENTORY 139 

Control of Finished Product Inventory by Production Orders 

The amount of any inventory of any finished product or 
of any material entering into the product should be based on 
the estimated future sales, covering the period for which it is 
necessary for the production division to plan their work. That 
is, if the manufacturing department requires four months to 
complete the product, from the securing of raw material to 
the delivery to stores, before the first of each month the sales 
manager should complete his sales estimates for the fifth month 
from that date. The estimate may include items for delivery 
during several successive future months. For obvious reasons 
such estimates are only practical for orders filled from stock. 
For those special products not manufactured in advance of 
actual sales but the sales of which can be closely figured from 
past experience, the estimates can only approximate the quan- 
tities of basic parts and materials required. A statement of 
future sales requirements should be forwarded to the stores 
records monthly and the quantity should be posted to the 
requirement columns of the stores record, after which the 
records are reviewed to secure any additional stocks needed 
to fill production requirements. 

Planning for Materials and Supplies 

In planning future materials and supplies requirements, 
the quantities of each kind of raw materials, component parts, 
and manufacturing supplies required for assembling or manu- 
facturing the finished product should be listed on Form 44, 
(page 228). A copy of this record is filed in the control de- 
partment. From it the quantities of materials required for 
orders are secured for posting to the appropriate stores records. 
If necessary, order requisitions are immediately written for 
those materials not available. In this way a close check is 
kept on both materials and parts required for turning out the 
finished product. Also requisitions for new stocks cover re- 



140 PRINCIPLES OF CONTROL 

quests only for quantities actually needed for the production 
of the finished product which the sales department states they 
will be able to sell during a given period, and a control is 
secured over the inventory of all materials entering directly 
into the production of finished product. 

Control of Work in Process Accounts 

Without an adequate control department, most plants un- 
knowingly drift into the condition of having several times 
too much material in process, the bulk of which is often rep- 
resented by comparatively few parts. Every production order 
issued means an increase in the work in process and then 
later in the stores accounts, and the cost of the material used 
is increased by direct labor and burden charges. Therefore, 
attention should be paid to the number of manufacturing 
orders "drifting" through process. To set standard limits to 
work in process, the same principles should be applied as to 
materials. A standard or maximum quantity to be in process 
at any time should be set so as to insure an adequate yet not 
an excessive supply, special attention being of course con- 
centrated on the more important items. An attempt to decrease 
the work in process inventory often results after a short period 
in a large increase in the raw materials inventory and a light 
finished product inventory, especially if a policy of retrench- 
ment has been adopted. However, since in practically all cases 
it costs less to store raw materials than to work them and then 
store the products, it is much better to have the larger raw 
materials inventory, especially as it is easier to convert them 
into cash if need be. 

Control of Supplies and Non-Productive Materials 

In the case of materials which do not enter directly into 
production, such as office and some manufacturing supplies, 
the "ordering point" and "ordering quantity" must be set more 



CONTROL OF INVENTORY 141 

arbitrarily than for the materials used in production. As the 
requirements during certain periods have little direct connec- 
tion with the advanced planning of production, and their im- 
mediate use is seldom known very far in advance, the ordering 
of replenishment quantities is more of a gamble than ordering 
production materials. But the consumption graph (Form 28) 
is almost a sure index of future requirements. 

Usually miscellaneous work on plant orders can be and 
is controlled in the same manner as the production of part^ 
for finished product, if the time allowed for delivery permits. 



CHAPTER XII 

STANDARDS AND SPECIFICATIONS 

Definition and Purpose 

A standard material or method, as the term is used in this 
book, signifies that material or method which has been selected 
as the best for attaining a given purpose and is therefore to 
be used for that purpose. The standardization of methods 
is just as important as that of materials. The chapters to 
follow on handling and stowing materials, contain simply 
hints for working out standard methods for doing these things. 
This chapter is chiefly concerned with the standardization of 
materials as an aid to their identification and procurement. 

The war brought home the advantages and economies of 
standardization to many who had not before realized them. 
The Conservation Division of the War Industries Board aimed 
to have the various industries of the country eliminate all un- 
necessary labor, and this included as its primary essential the 
diminution of the variety of products manufactured. An 
editorial in the New York Times thus summarized the 
situation ; 

Fabric mills are showing one thousand styles but the bulk 
of the trade is done in one hundred or two hundred. A discon- 
tinuance of 800 styles would release a great amount of material, 
capital, machinery and labor. The styles of shoes might be 
reduced by one-half; the shades of paint by two-thirds; and 
automobile tires from 287 sizes to 10 or 12. In one New Jersey 
town the grocery stores released 55 men by reducing their de- 
liveries to one daily. Twenty-six department stores have re- 
duced their delivery force from 600 to 218 men and from 241 
automobiles to 97. 

142 



STANDARDS AND SPECIFICATIONS 143 

The automobile tire manufacturers agreed to reduce the 
number from 287 styles to 32 at once, while the 32 were to be 
reduced to 9 types and sizes by November i, 1920 — fifteen 
months later. Official reports said that the motoring public 
would suffer no inconvenience, as the industry would be ad- 
justed so that the standardized types would fill both the old 
and the new conditions. These examples drawn from war 
conditions illustrate what can be done given the will to do it, 
and much of the good temporarily effected then has become 
business policy today. 

Advantages of Standardization 

By standardization there is a general saving all along the 
line of materials control. How much does it cost to put an 
order into process or to make a purchase? If the number of 
manufacturing orders could be halved, approximately half the 
clerical work necessary at all stages of a product's manufacture, 
and from its reception into stores and its delivery to customers, 
could be saved. 

In the experience of every concern some material is found 
to be out of stock at the time it is most desired. To a certain 
degree this cannot be avoided, as conditions are not always 
favorable for obtaining a new supply; but if standardization 
has not yet been carried out, investigation of the stores inven- 
tory would in all probability reveal some unnecessary material 
whose value could be added to the margin of safety of a 
standard material. Sometimes a number of materials are pur- 
chased or manufactured and are carried in stock, any one 
of which could be used in place of the others with a slight 
change in design or other feature of the article. Such near 
duplication causes a loss, not only because of the unnecessary 
investment and carrying charges, but also because the larger 
the amount of material purchased or manufactured at one 
time, the lower will be the unit cost. By the elimination of 



144 PRINCIPLES OF CONTROL 

small lots the standard materials can be secured in greater 
quantity, thus producing or purchasing on a larger scale with 
a steadying of the flow of supply. 

Standardization has the further advantage of requiring 
the department consuming the material to find out and to 
state exactly what kind of article is needed and the conditions 
it must meet. This results in a product of even quality and 
in satisfied customers, as no purchaser cares to buy from a 
house whose output varies in grade from month to month. 

Determination of Standards 

In selecting a standard material for a given purpose, it is 
necessary to study it from three points of view : 

1. How many uses can this material be put to and in which 

departments can it be used? 

2. What other materials resemble this material and can the 

one be substituted for any other ? 

3. What quality of this material will be good enough for the 

purpose it is to serve? 

The answers to the above questions can often be given 
only by the expert who is versed in grades and qualities and 
who thoroughly understands the manufacturing requirements 
to be filled. While as a rule the executive responsible for the 
selection of the materials used in the manufacturing plant 
occupies his position by virtue of his special training and ex- 
perience, a better method and more modern practice is to vest 
the selection and standardization of stores items in a com- 
mittee of manufacturing and purchasing experts. The spe- 
cialized knowledge of each is thus made available for all, while 
the standards set become part of the records maintained by 
the methods to be here explained. 

The standardization of materials should be carried out 
simultaneously with the preliminary classification. Useless and 
unnecessary materials should be rejected first of all. The 
fewer the number of items to be classified, the fewer and 



STANDARDS AND SPECIFICATIONS 145 

simpler will be the symbols to be adopted. As soon as the 
first listing for the classification of the materials already in 
stores has been made, standardization should be begun and 
completed before the final classification and symbolization of 
the items of stores. 

In deciding on a standard for raw material, the decision 
must primarily be based upon the requirements of the internal 
organization, and in deciding on finished product primary con- 
sideration must be given to salability and the wishes of cus- 
tomers as a matter of sales policy. Finished product should 
be standardized first, then component parts, and finally raw 
materials and manufacturing supplies. Miscellaneous supplies, 
such as stationery and belting, should also be standardized. 

Organization for Standardization 

To standardize there must be a central authority for direct- 
ing and controlling the work. The control department should 
make the classifications and symbols, for it controls the rec- 
ords, giving most of the information desired for both the 
establishment and the maintenance of standards. The work 
of standardization is similar to and parallels the regular work 
of the control department. Much of the data to be considered 
is taken from the stores records and what is not directly found 
therein is found in sources referenced by the record. This 
department, then, is in the best position to correlate the various 
qualities required of each material and may well direct the 
work. 

Since many considerations need to be given weight in 
choosing any material as the standard, and as there may be 
several departments to be consulted in order to get a full and 
rounded opinion of the needs of each case, committee action 
is most desirable. The discussion should be impersonal and 
open and each department should be encouraged to present its 
requirements in detail. 



146 PRINCIPLES OF CONTROL 

In regard to this, Walter Glenn Scott writes : 

Standardization is a group decision, fixed in a sense, but 
tentative on the development of something better, or more 
adaptable to a purpose. It is a judgment based on the e^iperi- 
ences of a majority, the masses, rather than the individual. 
Conception, or development, may be due to individual effort, 
but recognition and acceptance must be the composite decision 
of many minds before it can be called a standard. It is the lad- 
der used in the gaining of ideals. 

The departments interested in any one material are not 
many. The engineering department, if such a department 
exists, should be represented as the technical authority for the 
relative efficiency and value of all materials in use. The sales 
department, as representing the consumer of the finished prod- 
uct, should give the data regarding the use of the finished 
product. The purchasing department or the manufacturing 
department is the authority for determining the cost limitations 
of the materials under consideration. 

As soon as the work of each member of the committee 
has been decided upon, the usual course is to take up each 
item or article of those already in use for any purpose and 
to investigate the physical properties (quality, size, color, quan- 
tity used, etc.) required of each to meet the conditions of use. 
This information is then tabulated. If any obvious duplica- 
tions or unnecessary items appear, the more expensive or less 
efficient are eliminated at once. In this way a complete state- 
ment is drawn up of the properties that one article must 
include to be the standard for all purposes. With this specifi- 
cation as a guide, the purchasing department canvasses the field 
for such an article with adequate sources of supply if the 
material is purchased, while the engineering department 
endeavors to redesign a part or product that may be inter- 
changeable for all purposes, or, if necessary, to design a new 
part or product. 



STANDARDS AND SPECIFICATIONS 147 

Example of Standardizing Materials 

A simple example of the work of standardization will not 
be out of place. In a certain plant there were in use five 
different kinds of small envelopes. No. i was used by the 
personnel department to enclose the badges given to employees, 
the only requirements being that of size — larger than 2x4 
inches. No. 2 was used by the paymaster's department for 
enclosing the wages paid to each employee. It had to be 
strong enough to hold the coins and not over 3x5 inches in 
size to fit the trays in the cases carried by the paymasters. 
No. 3 was used in the company's hospital for dispensing drugs 
and had to be over 2 inches square in size. No. 4 was used 
by the assembly department for issuing screws and small parts 
to assemblers, and its requirements were the same as No. 3. 
No 5 was used by the offices for sending messages to the offices 
or shops. 

The study of the different purposes served by the several 
envelopes showed that one envelope could meet all require- 
ments. The tabulation gave a full description of what was 
needed — an envelope of any color, any quality, strong enough 
to prevent coins from tearing through the paper under slight 
handling, any size larger than 2x4 inches and smaller than 
3x5 inches, with a supply of 200,000 per year. With this 
specification, the purchasing department secured bids from 
envelope manufacturers, and the standardization committee 
found that a size costing less than any size or quality in stock 
could be secured in ample quantities from several sources. 
That envelope was chosen as the standard and the saving in 
the cost amounted to about $80 per year. In addition four 
items were cut out of the classifications and symbolizations, 
and the clerical work of maintaining five stores records was 
reduced to one record. The storesroom handled one material 
instead of five, and the purchasing department made one pur- 
chase instead of five. 



148 PRINCIPLES OF CONTROL 

The standardization of all materials proceeds as illustrated 
above. 

Example of Standardizing Product 

The standardization of the finished product results in as 
notable economies as does the standardization of other items 
of stores. A manufacturer known to the writer lists in his cata- 
logue 4,000 varieties of one kind of product of small unit 
value. Of these he attempts to stock only a few hundred items. 
This large number is assembled from about 300 different kinds 
of raw materials and component parts. While orders are 
received from customers for practically every one of these 
4,000 kinds, the completed products vary but little. In fact 
they are so similar that probably any one of ten different 
kinds could be shipped on an order without any detriment to 
the customer's requirements and even without his recognizing 
the substitution except for the label on the carton. Orders in 
quantities of fifty up, are accepted for any one of these prod- 
ucts, and the sales department endeavors to supply exactly 
what is requested. This means that the 3,700 varieties v/hich 
are not stocked and orders for which comprise one-twelfth 
the total, must be specially assembled for shipment within 48 
hours of the receipt of the customer's order. The confusion 
and the difficulties which this presents to the assembling, con- 
trol, and sales departments of this organization are obvious. 

Under ordinary circumstances it is annoying to customers 
to restrict the variety of products unless such restriction proves 
of benefit to them as well as to the manufacturer. There are 
three inducements for securing customers' consent to the re- 
duction of the varieties of product — better service, better goods 
at the same price, or better price for the same goods. To 
offend customers to the point of losing profitable orders in 
order to save a small amount in costs is of course a penny- 
wise and pound- foolish policy. 



STANDARDS AND SPECIFICATIONS 149 

In the case cited the manufacturer studied his sales sta- 
tistics and found a large number of items with few sales dur- 
ing the past year. These he eliminated at once. Then instead 
of refusing orders for any products except those retained as 
standards, he persuaded his customers to restrict their orders 
to a smaller number of kinds. When the demand had prac- 
tically ceased for certain items, he dropped them from the 
catalogue. Of the i,ooo varieties finally retained as standard, 
600 comprised 95% of the total business. The mere cata- 
loguing was an invitation to order them and meant more work 
without corresponding profit for his organization. While his 
line still contained many unnecessary items, these were not 
immediately dropped for reasons of policy. By offering a 
better discount on the catalogue price of the goods he wanted 
to sell, the manufacturer led his customers gradually to the 
purchase of a few standard lines. 

Specifications 

Once the standard is decided upon, a written description 
should be prepared specifying every characteristic the material 
is required to have. This description is the "specification" for 
that material and as such will be used by the manufacturing 
and purchasing departments as defining the various properties 
which the material must have and must not have. 

The use of the specification varies with conditions. Some 
plants dispense with them entirely. Others specify minutely 
most articles purchased or made. It is probable that almost 
every plant has specifications covering its finished product. 
They may not be known by that term although they may have 
long been used by the inspection department in passing prod- 
ucts as fit for sale. Manufactured parts may also be covered 
by specifications — blue-prints of standard parts drawings — es- 
pecially when articles are intended to be interchangeable or 
are inspected before being turned into stores. To sum up, 



150 PRINCIPLES OF CONTROL 

every Item kept in stores or listed in the inventories should be 
covered by a specification to insure its exact replacement when 
required. 

A specification may begin with a statement of the processes 
by which the material is to be made, if the process is likely to 
affect the quality of the material as in the case of steel. This 
may be followed by a statement of the chemical and the 
physical properties wanted or not wanted and the tests by 
which the presence or absence of those properties is to be 
detected. This matter of tests is important and should never 
be omitted, as it saves disputes and defines in advance how 
quality is to be determined. The usual and the most satis- 
factory way to express properties is to state the upper and 
lower limits allowed. For instance, a certain grade of steel 
may need to have not less than a given per cent nor more 
than a somewhat higher per cent of carbon. Sometimes only 
one limit need be specified; for instance, the tensile strength 
of steel may be at least so much, and as high as the maker 
chooses. 

The workmanship and finish and size or weight, etc., should 
also be described when necessary. To be complete, purchase 
specifications should also state the packing, marking, and ship- 
ping directions. It may also be advisable to specify when the 
inspection of the material offered under the description is to 
take place and what disposition is to be made of any article 
rejected by the purchaser. 

Model Specifications 

Purchasers and producers of practically any basic raw 
material and of many semi- and wholly-manufactured articles 
will find in public records specifications covering almost every 
kind of standard or staple article. Professional societies, such 
as the American Society of Mechanical Engineers and par- 
ticularly the American Society for Testing Materials, have 



STANDARDS AND SPECIFICATIONS 151 

drawn up specifications covering most of the basic minerals. 
The catalogues of many manufacturers and dealers afford val- 
uable information, as do also the bulletins of the Bureau of 
Standards of the United States government. Again, the gov- 
ernment's annual "General Schedule of Supplies" furnishes 
excellent specifications of a large number of items. A few 
illustrations of the general style and wording follow : 

Ink, blue-black, writing fluid; must be securely packed in 
wooden boxes sufficiently strong for reshipment. 

(i) The writing fluid must be gallo-tannate of iron ink, not 
inferior in any essential quality to one properly prepared after the 
following formula, in which all the ingredients are of the strength 
and quality prescribed by the United States Pharmacopoeia, and the 
per cent of true acid present in the sample of tannic acid used has 
been determined by the Loewenthal and Schroeder method : 

Take of pure dry tannic acid, 23.4 grams ; of gallic acid, in crystals, 
y.J grams; of ferrous sulphate, 30 grams; of dilute hydrochloric acid 
(U. S. P.), 25 grams; of carbolic acid, i gram; of dye, bavarian 
blue (D. S. F.), Schultz and Julius No. 478, 2.2 grams; make to a 
volume of 1,000 cubic centimeters at 60" F. with water. 

(2) Deliveries will be subjected to the following tests, as com- 
pared with the standard ink described above : 

(a) A fluid ounce allowed to stand at rest in a white glass vessel, 
freely exposed in diffused daylight for two weeks to the light and 
air, at ordinary room temperatures, protected against the entrance 
of dust, must remain as free from deposit upon the surface of the 
ink or on the bottom and sides of the vessel. 

(b) It must contain no less iron, and must have a specific gravity 
of 1.035 to 1.040 at 60° F. 

(c) It must develop its color as quickly. 

(d) After a week's exposure to diffused daylight the color must be 
as intense a black when used upon paper, and it must equally resist 
changes from exposure to light, water, air, alcohol, and bleaching 
agents. 

(e) It must be as fluid, flow as well, strike no more through the 
paper, nor remain more sticky immediately after drying. 

(3) The bottles must be labeled neatly, conformable to a form 
to be prescribed, and such form of label must not be used on bottles 
containing inks not manufactured for the Government : neither 
shall this form of label, or any similitude of it, be used in connec- 
tion with any advertisement, circular, or other publication emanating 
from the establishment of any private individual, company, or corpo- 
ration. Labels for bottles of Government standard writing fluid 
must be printed in blue, on white paper. The name and location 
of the manufacturer may, if so desired, be placed on the labels. 

(4) The successful bidder will be required to furnish the standard 
inks, subitem a, in flint-glass bottles ; each quart bottle must contain 
32 fluid ounces, each pint bottle 16 fluid ounces and each half-pint 
bottle 8 fluid ounces. 



152 PRINCIPLES OF CONTROL 

Hose; best quality; couplings to be attached to hose, when so 
specified : 

Note. — Upon request, the Bureau of Standards will advise order- 
ing offices whether hose delivered complies with requirements. A 
3-foot section of hose must be furnished, with request, for test. 

(a) Water; in 25 or 50 foot lengths, as ordered, full lengths 
only ; on samples and specifications — 

All water hose must be soft and pliable, made of long-staple cotton 
duck, good quality rubber tube, cover and friction. 

Inside of tube to be smooth and free from cracks or imperfections; 
minimum thickness of tube 1/16 inch, of cover 1/32 inch. 

Each 25 or 50 foot length of hose to be branded with trade-mark, 
name of maker, and date cured. 

Each 25 or 50 foot length of hose to be provided with male 
coupling at one end and female coupling at the other end; couplings 
to be approved form and securely fastened with clamps. 

Strips of rubber % inch wide cut longitudinally from tube and 
cover of plied hose when stretched 300 per cent (2 to 8 inches^ for 
I minute must show not more than 25 per cent set in 2 inches, 
measured i minute after release. Specimens while under tension 
shall show no pits, holes, or imperfections due to particles of 
foreign matter. 

Friction of plied hose determined on a i-inch section cut from any 
part of the hose shall be fairly uniform and not exceed i inch per 
minute under a 15-pound weight. 



Steel ; on specifications : 

(o) Cold rolled; weight per cubic inch is 0.2833 pound; 
specimens 2 inches long between measuring points 
to have an ultimate tensile strength of not less than 
80,000 pounds per square inch, an elastic limit of 
not less than 55,000 pounds per square inch, an 
elongation of not less than 10 per cent, and a con- 
traction of area of not less than 25 per cent ; bars 
with dimensions of Y^ inch or less to be tested full 
size as rolled, bars greater than ^ inch may be 
turned down to a diameter of ^ inch ; cold-rolled 
steel to contain not more than 0.06 per cent of phos- 
phorus, nor more than 0.06 per cent of sulphur; 
bars must be perfectly straight and true to the size 
specified, and must be free from cracks, flaws, 
seams, or other injurious imperfections, and have a 
workmanlike finish. 



STANDARDS AND SPECIFICATIONS 153 

Cotton drilling: 
Unbleached — 
44 inches ; on sample and specifications 



Material. — Shall be made from long-stapled, sound-fiber cotton, 
free from shives, motes, or adulteration. 

Quality. — The fabrics shall be a good quality, evenly spun and 
woven, and commercially free from faults. 

Width. — ^Shall be not less than 44 inches nor more than 45 inches 
when finished. 

Weight. — Shall be not less than 12 ounces per linear yard. 

Construction. — Shall be not less than 54 threads of warp nor 
less than 46 threads of filling per inch in the finished cloth. 

Tensile strength. — The warp shall be not less than 100 pounds, 
and the filling shall be not less than 90 pounds. 

Finish. — The fabric shall be soft finish and shall be free from 
"loading" of any kind. 

Specifications in the Purchasing Department 

Specifications are of particular importance in the work of 
the purchasing department, giving them a definite and explicit 
description of what they are to buy. This exact knowledge 
of what is needed is in turn passed on to the supplier, enabling 
him to get a clear idea of what he is asked to furnish. He 
cannot misunderstand and his bid must be for the same 
material as his competitors supply. If he is awarded a con- 
tract, any substitutions and adulterations — intentionally or 
otherwise — can be immediately detected on the inspection of 
the material after its receipt. Nothing is left to chance, to 
guess-work, or to trade-names which never have as definite a 
meaning as a complete specification. 

Prices, and materials "made to meet a price," are con- 
stantly changing, but when prices are based upon a specifica- 
tion, they can always be accurately compared at all times, as 
they are based on a material of the same quality. While such 
matters as the process of manufacture or the disposition of 
rejected parts is not always pertinent to production specifica- 
tions, all necessary details need to be specified in purchasing 
materials to avoid confusion and misunderstanding. More- 
over, there is always the possibility that at some time a manu- 



154 PRINCIPLES OF CONTROL 

facturing part may be purchased. Then these seemingly super- 
fluous details become valuable. No purchasing department 
should fail to encourage the building of a complete set of 
specifications for at least all materials regularly purchased. 

Maintaining Standards 

When the task of standardization has been completed, the 
results of the work should be made as permanent as possible 
to guard against the deterioration in the standards set. This 
permanency can be secured by the establishment of a control 
through a central approving authority on the specifications of 
materials purchased and manufactured, and by keeping proper 
records of the products afifected by any change in a raw 
material and of materials and parts affected by changes in 
products. This last method of control is illustrated in the 
standard production analysis records (Forms 44, 45, and 46), 
to be described in Chapter XVIII on "Graphic Production Con- 
trol." Every product is covered by a record of all materials 
and parts used in its production, and for every article there 
is a statement of the products into which it goes or the uses 
to which it is put. This is also on the stores records. Then 
if a product is discontinued, it is easy to determine the materials 
thereby affected; and if the supply of a material fails, or 
changes, there is a record of the products or uses affected. 

The control department is the logical agent for exercising 
the controlling authority over production materials, since no 
stores of any kind can be ordered without its approval. This 
"board of censors," if it is a control department, controls the 
origination of all stores requisitions. The requests to stock 
material should be investigated before approval and, if pos- 
sible, a standard article substituted, in which case the original 
request is of course killed. The majority of the needs of 
special materials are caused by manufacturing a special product 
or for carrying out a special project. In such cases the en- 



STANDARDS AND SPECIFICATIONS 155 

gineering department will have forwarded to the control de- 
partment as a part of its plans, a list of the special materials 
or parts to be secured either by purchase or manufacture. 
When requirements are specified in that way, the items are 
procured without question. But if no central responsibility 
exists for requesting specials, the miscellaneous requests of the 
plant must be subject to strict questioning. As before stated, 
materials regularly stocked can often be substituted for special 
requirements. 

Periodical Revision of Standards and Specifications 

Though materials may be standardized, the standards of 
today may not be applicable six months hence. Therefore it 
is necessary to review them periodically, adapting them to new 
conditions or requirements or improvements in what the mar- 
ket offers. Often the need for a material passes and it becomes 
possible to eliminate the item and use up, sell, or get rid of 
the available supply in some other way. The storesrooms 
should not become clogged with obsolete materials occupying 
space that could be put to better use. In nine cases out of ten 
the control department is not advised when the use of a ma- 
terial or supply is discontinued. Therefore, it is necessary for 
its own protection to review the records periodically, to see if 
the items represented thereon are in demand. If investigation 
shows any item to be obsolete, it should be discarded. 

The purchasing and manufacturing departments may be 
able to suggest many possible changes in the standards as new 
materials and methods are called to their attention. Technical 
matters should be referred to the engineering department for 
a decision, and office supplies to the office manager, and if 
the standard is changed, new specifications should be drawn 
up. By such means as these the items of stores are kept up 
to and within the limits of requirements, while the inventories 
are carried on the books at their correct figure. 



CHAPTER XIII 

ARRANGING AND EQUIPPING THE STORESROOM 

Function of the Storage Workers 

We have seen that the work of storeskeeping is divided into 
two parts : the maintenance of the controlHng stores records 
by the clerical workers, and the physical care and storing of 
the materials by the storage workers. This last group is re- 
sponsible for the safe custody of all items shown on the stores 
records from the time they are turned into stores until with- 
drawn. 

It is the duty of the storage personnel to keep all materials 
in their charge in perfect condition, accessible at all times, and 
stored in such a way that the work of receiving and delivering 
may be handled with the minimum of time and effort. These 
matters receive probably more attention in the majority of 
organizations than the work in connection with the recording 
and control routine, as it is self-evident that when stores are 
not carefully cared for, waste and loss are unavoidable. 

Planning the Storesroom 

If the storage group is to render maximum service, the 
convenient handling of materials within all sections of the 
storesrooms is a matter of first importance. To this end, the 
use of the entire space of the storesroom should be carefully 
allotted in detail to the different materials, with aisles laid out 
in such a way as to enable the clerks to find materials as easily 
as possible so that there may be no delay or loss of energy 
in movement to and fro. This involves two things : keeping 
every section of the storage space accessible, and the proper 

156 



ARRANGING THE STORESROOM 157 

placing of every item. Too much pains cannot be devoted to 
planning for the work to be done in an orderly and systematic 
manner if the final purpose — the immediate accessibility of 
every item — is to be fulfilled. In planning the arrangement 
and layout, several things should be kept in mind which for 
the sake of clearness are here enumerated: 

1. Methods of placing and removing various classes of items 

should be reduced to standards. This requires uniformity 
of method both as regards stowing units of lots and the 
separating of lots so that the oldest may be used first. 

2. The equipment should be flexible and interchangeable for 

varying conditions. 

3. Every item should be properly placed. The location is 

governed by the difficulty of handling, the quantity in 
stock, the frequency of use, and various special considera- 
tions of perishability, safety, or similarity to the storage 
problem of other materials. 

4. All goods should be clearly identified before being stowed. 

This includes a tag for every lot and a label for every 
unit or package. 

5. All goods should be stow^ed in issuable units and placed to 

show the greatest possible number of individual units or 
packages. 

6. Each item (and each lot v^henever practicable) should be 

kept distinct and separate from every other item and lot. 

7. The installation of proper equipment which will aid in 

handling items in a minimum of space, of time, and of 
effort. 

Hours of labor and dollars of expense can be saved by 
intelligent consideration of the foregoing matters. 

Where the storeskeeper has the planning of new storage 
areas, he will find it pays to observe the following sequence in 
making the layout : 

i. The listing and classification of all items expected to be 
stored according to problems of: 
(a) Measurements. 



/58 PRINCIPLES OF CONTROL 

(b) Difficulty of handling. 

(c) Frequency of use. 

(d) Special considerations, as of sensitiveness, perish- 

ability, or of peculiar similarity. 

(e) Quantities to be carried. 

2. Determination of ample storage space to be required. 

3. Determination of proper unit storage space. 

4. Determination of proper aisle spaces. 

5. Determination of proper location in relation to departments 

served. 

6. Determination of proper layout of storage and aisle space 

as related to general location of classes of items and area 
of total space available. 

7. Lastly, the planning of structures so that entrances, aisles, 

posts, platforms, windows, and other necessary features 
will not interfere with, but will facilitate the most desir- 
able layout of the stores themselves. 



Written Standard Practice Directions 

These data, with the exception of course of the determina- 
tion of the aisles and such spaces as are physically marked off, 
should be reduced to written standard instructions and, when 
supplemented with the procedure for handling the materials 
themselves, are complete instructions. 

The importance of establishing in writing the standard 
methods of placing and removing the various items, and thus 
reducing their stowage to a system of rules, need not be 
emphasized. The effort to standardize procedure and practice 
forces attention upon the one best way to be followed until 
canceled or recalled. What is determined may be or may not 
be the best, but nevertheless the consistent following of even 
poor standards brings better final results than the haphazard 
and occasional following of the best of standards. The more 
completely a poor rule is observed, the more clearly will its 
failings be revealed, and the more readily will it be revised and 
corrected. 



ARRANGING THE STORESROOM 159 

Location of the Storesroom 

The provision made in the old-time concern for the physi- 
cal care of material, more often than not, was far from ade- 
quate. The space set aside for the storesroom was usually 
any available space, perhaps merely a shed in an inconvenient 
location, dark and poorly cared for and ill adapted for any 
useful purpose. That kind of a storesroom has had its day. 
The modern factory manager has learned that it pays to pro- 
vide carefully for the proper care of his stores. He considers 
the various features of location aad the requirements of the 
building desired for the storesroom or the several rooms which 
may be needed in a large plant, where each kind of stores, 
whether general stores, component parts, finished product, or 
by-product stores, may be kept in distinct departments. 

In the layout of a large plant the aim is to keep the move- 
ment of material in one direction and as nearly as possible in 
a straight line — from the raw material storesroom, through 
the manufacturing shops, the component parts storesroom, the 
assembly shops, the finished product storesroom, to the ship- 
ping department or whatever the final destination may be. 
This can be accomplished by placing the storesroom for each 
class of material closest to its delivery point. The economies 
secured by reducing the trucking from machine to machine 
and department to department while materials are in process 
have long been recognized. The storesroom usually should be 
near the delivery point in order that orders may be quickly 
filled and that the trucking problem may be as simple as pos- 
sible. This is particularly true of all materials handled in 
small lots. It is simpler to truck large quantities of one 
material a long distance than it is to truck a large number of 
small quantities a short distance. Every yard of transporta- 
tion and every minute of time which can be saved by the 
selection of the best available location is worth while. In 
addition to accessibility, other determining factors in location 



I60 PRINCIPLES OF CONTROL 

are the nature of the material to be stored, and the length of 
time during which the material will be held in stores. 

Size of the Storesroom 

If conditions permit, the storage space should be large 
enough to care for all probable temporary increase from time 
to time in the amount of the stock. In nine cases out of ten 
the storesroom is skimped for space. Proper storage of all 
items often requires from 30% to 60% of the floor space 
devoted to the plant — the former figure, for instance, in ma- 
chine shop practice, and the latter in a rolling mill. 

The right amount of space in a well-planned stores lay- 
out is essential. More than this amount is wasteful, whereas 
less than this amount for each particular purpose leads in- 
evitably to congestion, and congestion in storeskeeping is 
costly. 

Storing Materials 

The aisle arrangement governs the storage space. When 
shelving is used, 24 inches is a good depth for each side, or 
a total depth of 4 feet from aisle to aisle. When articles are 
placed upon the floor, 6 feet is a workable width for a row. 
Usually main aisles should be wide enough for the passing 
of trucks, whereas side or connecting aisles may be designed 
for one-way trucking only. Thirty inches is the standard width 
for aisles between bins or shelves where the contents are package 
goods handled by hand. 

Just as important as the allotment of sufficient aisle space 
is the requirement that aisles be not obstructed by things left 
standing in them or by the projection of things stored along 
their margins. The delay caused by unexpectedly encountering 
a blocked aisle is always wasteful — likewise the danger of 
goods, projecting from their storage space, being damaged by 
passing trucks is obvious. 



ARRANGING THE STORESROOM l6l 

The inability to realize the necessity of ample space and the 
effect of inadequate provision is illustrated by the conditions in 
a rolling mill known to the writer. Scattered over the mill 
yard are nearly a half million dollars' worth of spare machine 
repair parts. Few parts are located near the machines they fit. 
No attempt has been made to keep each kind of part together, 
hence there are scores of duplications, with no records of 
quantities, values, or locations. Parts are exposed to the 
weather, except a small quantity stored on the floor of a build- 
ing abandoned for productive work because water covers the 
floor after a heavy rain. The parts stored there are in about 
the same condition as those in the open, some of them showing 
^ inch of rust in the key-ways. Excavations for a new build- 
ing uncovered many parts, completely buried under the soil. If 
these parts were put under proper control, the inventory could 
be reduced more than three-fifths. No machine would be shut 
down for hours while the replacement part was being found, 
and the deterioration and loss due to weathering would be 
omitted. 

Storesrooms do not exist in this plant because the business 
has made so much profit that the management disregards these 
losses as inconsequential and that it is a useless expense to 
build the proper sheds to care for the parts. 

Allotment of Space in the Storesroom 

With accessibility constantly in mind, in making the layout 
the space set aside for storage should be divided into sections 
for the receiving, stowing, and delivering of materials. Once 
determined upon, these spaces should be reserved exclusively 
for the purpose to which they were allotted. It is well to have 
their outline marked or painted upon the floor or identified by 
some other striking method. Bins, shelves, or other fixtures 
define space limits. For open spaces, the more permanent and 
conspicuous the boundary lines are made, the better. In many 



1 62 PRINCIPLES OF CONTROL 

buildings, Tines 3 Inches wide, of paint or of strips of bright 
metal tacked to the floor, have been used effectively. 

The space set apart for the reception of materials need only 
be large enough for such sorting as is necessary preparatory to 
stowing in the proper section. This space may be distinct 
from the receiving and the inspection departments, and if no 
inspection of the material for quality and quantity is to be done 
on the storesroom floor, the room will be small. When stowing 
the material the clerk certifies on the material received report 
that the number of units called for have been stowed, after 
which he forwards the report to the stores record. 

If there be more than one storesroom, the order for the 
material or parts should state the location of the room and 
the items should be moved to that place direct from the receiv- 
ing department or the manufacturing shops, to reduce handling 
to a minimum. Thus the chief use of each receiving room will 
be the checking of quantity and the planning of its disposition 
in the storage space. 

Where possible, the storage space should be located between 
the receiving and the delivery spaces. Ample space should also 
be allotted for packing and preparing materials for delivery. 
Individual packages from the various stowage spaces will be 
received here for making up into larger packages to be routed 
and delivered to the shops. 

Aisles 

Aisles should be perfectly straight and of sufficient size to 
fill all the requirements of moving and handling the material. 
Main aisles should conform to the direction of maximum travel. 
Sub or side aisles should be at right angles to main aisles. 
Usually and for preference, these side aisles should be at right 
angles to the source of light. If the room is wide, a center aisle 
is best with side aisles branching to each part of the storage 
space. If the room is narrow, a main aisle along one wall may 



ARRANGING THE STORESROOM 163 

be better than a center aisle. But In general there should be a 
main aisle with the necessary side aisles branching off to all 
parts of the room. 

The width of aisles should be planned according to their 
use and the size of conveyors and materials to be handled in 
them. The articles then must be placed so that the location in 
storage is known. A very simple arrangement is that of placing 
the articles by rows according to the symbol of the material. 
This method, however, entirely disregards the ease with which 
each material can be handled and is adaptable only to simple 
conditions of storage, such as when package goods are the only 
items handled. 

Symbolizing the Storage Spaces 

The better method for general application in practically all 
cases is to arrange the materials as conveniently as their bulk 
and use permit and to disregard the stores symbols. Each 
storage space should be symbolized for identification so as 
easily to locate the space. This symbol is to serve as the index 
of the material's location. Each row should be numbered in 
order, even numbers on one side of the main aisle, odd numbers 
on the other. Then each section of each row of bins or each 
yard of the rows of stacked material would also be numbered, 
beginning at the main aisle, odd numbers on one side of the 
aisle, even numbers on the other. Each tier in each section 
would be given a letter which would appear in the index 
between the two numerals. Thus "35A6" might represent the 
top tier of the sixth section in row 35. 

Each storage space should have its location symbol painted 
upon it. The row symbol should be on the end of the row along 
the main aisles. Section symbols should be at the top and 
bottom of each section, while the proper tier symbol should be 
upon each partition between sections. 

A chart of the entire layout and symbolization should be 



164 PRINCIPLES OF CONTROL 

drawn up and posted in a prominent place in the storesroom so 
that a new employee or other person unfamiliar with the scheme 
of symbolization may be able to find any item after a few 
minutes' study of the chart, if he knows the location symbol. 

An index file of the location of each material, preferably of 
a visible type, should be hung in a prominent place. Only 
the material description, symbol, and location symbol need be 
noted. If, as described in Chapter VIII, standard definitions 
and symbols have been assigned to materials, the identification 
of each kind of material is simple. 

Each storage space should also have indicated on it the 
symbol of the material stored therein. A small card held in 
a light metal frame of small size, such as i/4x5 inches with 
edges turned over to prevent the card from falling out, serves 
the purpose. 

Mechanical Aids 

There are various mechanical aids for the rapid handling 
of material which should be used in every storesroom. Such 
are flexible bins, counting machines, trucks, etc. The require- 
ments of such equipment are flexibility, adequacy as to character 
and strength, and permanence. In every manufacturing 
establishment, certain operations become so much a part of 
the common routine, so incidental to other operations, that 
their costs often escape notice and their efficiency is never 
questioned. The handling of material is decidedly such a 
problem. In the storage of material there are abundant 
opportunities for loss of time and of material, unless facilities 
are provided for taking care of the property in an economical 
and effective way. The best way is generally to dispense with 
man-power to the greatest possible extent. 

In few live organizations are conditions the same year after 
year ; in some the conditions change materially season by season. 
But a storesroom is built and equipped once and for all and is 



ARRANGING THE STORESROOM 1 65 

then used every day perhaps for many years to come. Hence 
the importance of flexibility in the arrangement and the pur- 
chase of storage equipment as needed. 

Standard Storage Units 

The specific arrangement and construction of the various 
bins and racks depend upon the character and quantity of the 
goods. These factors also determine how the material is 
handled and transported, whether singly or in bundles, in 
barrels or tote-boxes, in barrows, trucks, or conveyors. 

The determination of a standard rectangular storage unit 
such as a floor space of an area 4x3 feet, as the basis for the 
layout of the stores plant, is a great help in obtaining flexibility. 
Bins, platforms, and floor spaces can then be made to correspond 
to this unit of base area and so be interchangeable. Thus, 
without affecting in any way the general plan and layout, the 
particular equipment in use may be shifted to meet varying 
conditions. The same principle applies to the subdivision of 
bins and will lead to the adoption of a standard unit bin of such 
inside dimensions that it will hold a large variety of standard 
removable subdivisions. 

Bin Subdivisions 

The best shelving for bins is constructed of standardized 
steel parts which can be adjusted to form a storage space of any 
desired size and opening by the simple operation of bolting a 
few steel sheets and bars to a frame. All parts are standardized 
and interchangeable, easily and quickly erected or taken down. 
The stacks may be made up singly or arranged in series in 
rows. For instance, a bin, 24x24x24 inches inside, gives op- 
portunity for a wide variety of subdivisions 24 inches deep 
whose other two dimensions will be even fractions of 24 
inches. 

The advantages of this shelving are many. Its mobility 



166 PRINCIPLES OF CONTROL 

and its convertibility into convenient receptacles for handling 
widely varying types of material, its great strength, its econom- 
ical use of floor space, and the fact that it is fireproof and 
practically indestructible, make it especially desirable. It can 
be purchased in sections and added to as conditions require. 
Changes of location and arrangement are easy to accomplish 
with this standardized equipment, without serious interference 
with the necessary work of the storesroom and without the 
charges for labor and new material which inevitably follow 
alterations on wood construction. 

Skids and Trucks 

The basic idea back of the use of skids and elevating trucks 
is the separation of running gear and load platform and the 
utilization of a large number of detached wooden skids, which 
can readily be built in the carpenter shop. When the truck is 
rolled under a loaded skid, and the handle is thrust downward, 
the lifting bars raise the skid and its load off the floor, ready 
for hauling away. The skid and lifting bars remain locked in 
this elevated position until intentionally released. Then by the 
descent of the handle, the load is eased to the floor in its new 
position. The truck is pulled out from under the skid and is 
ready for another load. 

The economy of keeping heavy and bulky materials — such 
as large size, flat paper or heavy castings — on skids to be 
moved from place to place by means of elevating trucks from 
the time they enter the plant until final disposal, is apparent. In 
addition, skids serve as platforms to keep the material off the 
floor, protecting it from dirt and from being easily bumped. 
The skid is also adaptable to many forms of convenient bins, 
racks, crates, containers, etc., reducing the number of time-con- 
suming motions in handling material in storage and in process. 
The device also serves the purpose of a more expensive 
platform truck besides providing a means by which material 



ARRANGING THE STORESROOM 1 67 

may be routed through the plant with Httle or no handhng. 
Heavy goods when once placed on skids can remain there and 
be shifted from place to place with a minimum of handling. 

Counting Machines 

A counting machine which scientifically applies the principle 
of ratio weight in a simple machine of few parts which any 
ordinary laborer can operate and understand is a device of 
wide utility and economy in the storesroom. Such a device 
gives an accurate and quick count of any commodity, consisting 
of similar parts or pieces, without the use of tabulated figures 
of weights, mental calculations, or figuring of any kind. They 
are particularly adapted to the counting of goods of small size 
and in large quantity, such as papers, druggists' tablets, and 
small hardware. The total count of the contents of any box, 
barrel, bag, truck, or barrow containing an unknown number 
of like parts or pieces, can be determined accurately and almost 
instantly. There is no chance for confusion of figures, errors 
in estimates, or defective calculations, as the accuracy of the 
count is insured mechanically. Mental fallibility is eliminated 
and from 50% to 90% of time and mental labor is saved. 

While a knowledge of the weight of the material handled 
is at no time a feature in obtaining count, yet whenever desired, 
weight and count may be secured in one operation. 

Branch Storesrooms 

Manufacturing conditions are sometimes such as to require 
the operation of "departmental stores" or "substores." Such 
substores are often opened in or near a consuming department 
for emergency use or to save trucking and handling, by with- 
drawing from the main storesroom a part of the stock on hand. 
This stock might pass under the physical control of the depart- 
ment which expects to use it, but preferably remains under the 
control of the central department. 



CHAPTER XIV 

STOWING MATERIAL 

Definition of Stowage 

Stowing, as everybody knows, is the act of putting things 
away in their proper places according to proper methods. 
Since, however, the method of stowing largely determines 
the facility with which things can be counted and removed, the 
term as used in storeskeeping includes the complementary work 
of removing and incidental handling. 

The discussion of the art of stowing goods in a storesroom 
may seem to be devoting overmuch attention to elementary 
common-sense matters. Yet system and method in stowing is 
the foundation of orderliness and care in the handling of things 
and therefore the beginning of system and control in the stores- 
room. If methods are reduced to standards, and standard 
methods of stowing each class of goods are insisted upon and 
reduced to rules, the result will be such neatness and uniformity 
that inspection and counting will be greatly facilitated. The 
exceptions to good stowing, by their very conspicuousness, 
will then be easily noticed and corrected. Accordingly, it may 
be said that a good system once adopted will enforce itself by 
making violations immediately noticeable. 

Where Goods Should Be Stowed 

The arrangement of material within the storesroom needs 
consideration. The space should be divided into sections set 
aside for the storage of particular classes of materials. For 
example, separate spaces should be allotted for stowage of 
large castings or materials of awkward form, of materials 

1 68 



STOWING MATERIAL 1 69 

in large packing boxes, of small uniform materials easily kept 
in a system of bins or shelves, and a space for the temporary 
storing of unclassified materials. Within these spaces, the 
individual items are stowed in rows of stacks or of bins or 
shelves. As previously noted, these rows should be at right 
angles to the source of light if such an arrangement is 
practicable. 

It should be a rule for goods to be stored only in the spaces 
reserved for the purpose. This means that window sills, ledges, 
floors, aisle spaces, etc., are not to be filled either permanently 
or temporarily with goods, unless the proper official authorizes 
the use of such space for that purpose. 

The Double-Space Method 

The maximum quantity or lot, ordinarily stowed at one 
time, should occupy not more than 75% of the space available 
if there is to be a reserve for times of special need. The ideal 
method, however, is the double-space system, by which double 
the space normally needed for the quantity of each item regu- 
larly received is set aside. This avoids the disadvantages of a 
separate storing place for surplus stock. The danger of separate 
storing — especially if the storeskeeper is responsible for the 
quantities on hand — is that some portions of items may be 
overlooked and a fresh supply ordered before it is really 
needed. On this account the allotment to each item of double 
the volume of an average lot received is well worth while where 
sufficient space is available. Such provision insures accuracy 
and simplicity in handling different lots because each may be 
kept separate so that the old lot always may be used first. It also 
results in less frequent need of locating stocks of any item in 
different places. Where the single-space method is used and 
a new lot comes in before the old is used up it is often neces- 
sary to put part, if not all, of the new lot somewhere else, 
there being no room in the space with the old lot. The double- 



1 70 PRINCIPLES OF CONTROL 

space system pays for itself in the savings in losses and spoilage. 
The less intelligent and careful the help, the more useful is the 
double-space system — it is more nearly "fool-proof." 

In stowing a bulky item of stores received in quantity, it 
should be a rule to concentrate it when possible. Thus two 
rows opposite each other (across a side aisle) should be filled 
in preference to two adjacent rows. Any excess over two 
full rows may then — if the storeskeeper so directs — be stowed 
in the aisle between. This saves space to almost the extent 
of solid block piling, yet preserves the flexible row arrange- 
ment with the maximum of accessibility. Side aisles may be 
used for stowing when the bins on either side are full of the 
same material. If that be insufficient, space in the main aisle 
adjoining a wall may be filled out even with full rows and 
aisles on either side of the same material. 

Treatment of Special Items 

The varying nature of the materials stored creates minor 
problems in stowing. With materials of small size or which 
are handled in small and infrequent lots, the storage problem 
is comparatively simple and uniform. With materials such 
as belting or lumber or other items of large size and awkward 
form, the problem becomes specialized. Belting, rope, and 
similar materials need to be stowed on reels for convenient 
handling. Inflammable materials, such as oil and gasoline, 
require special storage apart from the other storesrooms. In 
addition there are special considerations, such as the sensitive- 
ness of explosives, the great weight of castings or pigstock, 
the perishability of foodstuffs, or peculiar form and similarity 
of shape, such as pipe and barstock, which would clearly point 
to the advantages of stowing those items together. Whether 
the location under those circumstances is most convenient is 
generally secondary to the particular equipment necessary for 
their proper care. 



STOWING MATERIAL 17I 

Common sense requires large, heavy items difficult to handle 
to be given the shortest possible haul. It is advisable, too, to 
stow items of great weight near the floor but above the plat- 
form height of the truck on which they will be moved. Simi- 
larly, items easy to handle but carried in large quantities and 
frequently issued should be in a convenient location near the 
main aisle and at a convenient height from the floor. It is 
convenient likewise to assign a central location close to meas- 
uring devices for items which when issued have to be specially 
measured, such as barstock, or oil in barrels. Again, it is 
economical in time to stow near each other items usually issued 
together. 

The more frequent the occurrence of a storage problem, the 
more necessary it is to adjust conditions to meet the case. The 
receipt of an occasional lot of castings creates a special problem 
to the lumber dealer, just as a consignment of lumber may be 
a puzzle to the storage equipment of the machine tool manu- 
facturer. If the storage of lumber is a regular thing in fac- 
tory operation, the manufacturer could profitably visit a 
lumber yard and study the proper care of lumber, but storage 
of an occasional lot does not pay for the trouble and expense 
of securing special equipment and initiating special methods. 
Frequent and similar problems of storage lend themselves to 
standardized and definite methods. 

In every storesroom some articles are for the exclusive use 
of certain departments. If the quantity used by one depart- 
ment justifies it, a branch storesroom should be established to 
serve that department but it should be directed by the general 
storeskeeper who should retain his responsibility for the opera- 
tion of the substores. 

Keeping Items Distinct 

Great care should be taken that different items and different 
lots of the same kind of article be kept distinct. When requi- 



172 PRINCIPLES OF CONTROL 

sitions are being fiQed, tiae wmt is dosie as speedily as possible. 
Items of similar physical a.ppearaiice or packed in similar 
vcartons are easily mm*Si3hpm for each other if not stored in 
■separate spaces or Irats. For irostaDce, flat files and half-round 
•fiW of the same size may be in cartons differing only in the 
(description on the label. It would be easy for a clerk to pick 
np the -vrrong package if both >' '■ 'e stored in the same 
bin. If it is inieoess^-. t- -''-. :-^ items in one space, 

they should be separi : i inch if in bins, 

lOr three ™»rft>^ if on piatiorms. 

Tdsdb «ar eqtnproent in reg^ar use in storesrooms will be 
prawidedl witii specia^ -"[z-":-. marked so as to show the purpyose 
iof wukIi dbey L' 

Identifying the Materials 

Tbe idea] method of designating materia! would be not only 
to label each lot and package temporarily, but in such a way as 
■would i"'-- '^-- —ify individual items after separation from the 
Vr '^' '^"^.V -.,-r-,<^'-''-,A-. because from time to time it 

-. -i gin and past history of a lot 

-J aitide can be identified by 
; r ; . ,^.. . .^ny Q2.n be, and every package 

- ■■ -:d. Such labels should give the stand- 
' tiie tnatoial, its symbol, and the number of 
Titained therein. Other obvious details not always 
to are that y^'-'-^<^--'^^^nn mafks on packages when 
-^rr;ld preferab^.. :!t, or be con^asous. There- 

he package is usually fbe best place for lal>eling, 
' ' t number of labels will show, 
I ;.. .<.ages bdng misplaced. 

The Bin Tag 

A useful means of identification and a supplementary con- 
trol record is a tag atta<:hed to each lot Usually known as 



STOWING MATERIAL ITS 

a^ "Ian rag," it is used for ail materials stowed in stsefcs as AveH 
a® in bins. Tbe bin tag serves the otdctitioHai purpose ot in- 
ventorying- the material in tfte lot T ~ '.t 
when the material :s tirst received, ar - - ^^ 
on which it was received, the le*; tiie umt of issne asad thit 



y 















TCtSeS J^'-^CL 




-JT 


''• 


;escs*p^on 






cecnveo 


■'** -'O*'*^ ^*'- 


■AT 


:Ecirw-«? 




1 jufcMTiTv ^reer. - ^ - ^.' 


•ATF 


■"^L- 


TT.^ 


_ - -.r.e?' 








^■~ 


.:i.--^-' 















quaittLtT r««tvesL It i&- s«asrt with tfac: inatemL ta tfaer scora^ 
spact aj*i k^K: with tteit ittaterrdi a.t ait ttroesx A cottveaKstt 
wtty te ppivtittt it trT:?m !x' ^r tbfi: ■" S: 

stoweil is to havti a nmtai Ik .^^ i. . ^ ^ .' rhsi insK,.^ . aft: 
bin or lucictid i« squh* ace<i5«i.bk, atiurbv .liacch 



174 PRINCIPLES OP CONTROL 

The bin tag is operated in the same way as a stores ledger 
card. Before each requisition for material is filled, the amount 
issued is substracted from the quantity shown on hand and 
the balance is brought down. The symbol to which the material 
is to be charged is entered in the right-hand column as a refer- 
ence of the transaction. Conversely, if any material is returned 
on a stores return, it is added to the balance on hand when 
placed in the bin. 

When a bin tag is filled with entries, the quantity in the 
storage space is inventoried and that amount is entered on 
the tag as a check on the last balance shown. The heading 
and the amount on hand are filled in on a new tag and the old 
one is sent to the stores record for checking. When a lot is 
exhausted, the tag is also forwarded for checking. 

Surplus Stock 

Sometimes a bin proves too small for the amount of ma- 
terial allotted to it, and the surplus stock has to be placed else- 
where, perhaps in a distant storesroom. The second location 
should be indexed by means of the surplus stock tag (Form 30) 
placed in the bin tag holder. This tag indicates the where- 
abouts of the extra stock and the quantity there to be found. 
The material in the bin itself should be the oldest lot, and the 
bin should not be refilled until that stock is exhausted. 

While the various locations of surplus stocks are readily des- 
ignated in the way described above, the storage of similar lots 
in two places is a practice which has nothing to recommend it 
and everything against it. Much the better way is to provide 
ample space for the storage of lots of all sizes in one location. 

Rules for Good Piling 

It may seem elementary to state that articles should never 
be placed in a position which might cause injury to them, yet 
not all stores clerks remember that sheets of paper should lie 



STOWING MATERIAL 



175 



flat, brooms should stand on handle-end or hang, and barrels 
should stand on end; also in storing items subject to deteriora- 
tion from heat and dryness or from cold and dampness, it 



KEEP THIS TAG ATTACHED TO 
BIN TAG IN REGULAR STOCK 

o 

SURPLUS STOCK 



5TOOE S SYMOOl. 



OESCOIPTION 



LOCATED IN 



KEEP THIS TAG ATTACHED TO 
DIN TAG IN REOULAR STOCK 



ALWAYS USE MATERIAL FROM 
FIRST LOCATION 


DATE 


LOCATION C 


_)date 


LOCATION 



























































































































































Form 30. Surplus Stock Tag (red). 



Rsveoae 

(Size 2^x5^.) 



should be remembered that air near the ceiling is usually- 
warmer and dryer than near the floor. 

The rules of good storage demand that goods be placed all 
one way unless for stability it is desirable to reverse the direc- 
tion or to cross-pile. Reversing should be done singly or in 
groups, according as the goods are piled singly or in groups, 
the same dimensions, however, lying the same way. Cross- 



176 PRINCIPLES OF CONTROL 

piling, or laying goods in each tier or course at right angles 
to those just below, while increasing stability, decreases acces- 
sibility and sureness of count. As stability is generally less 
vital than accessibility and flexibility, cross-piling should be 
resorted to only in special cases. 

In general, the best way for goods to lie is with their ends 
out towards the aisle into which they will be withdrawn, unless 
space can be economized to a marked degree by placing the 
goods in some other way. Labels or other means of identifica- 
tion should be placed all one way showing outward, whenever 
possible, for ease of inspection. Articles with defective wrap- 
ping should be placed last, in order that they may be re- 
moved first. The person stowing goods should be made 
responsible for seeing that the tying or wrapping of packages 
is in as good condition as his facilities permit. This includes 
the putting on of new wrappings when necessary and feasible. 

The Unit of Stowage 

A thing which takes time when issuing material is the 
necessity of measuring or counting the quantity of material 
wanted each time a requisition is being filled. Not that such 
measuring is unimportant, for it is necessary, but a large part of 
the articles stored can be made into packages containing the 
usual quantity issued at one time. This requires goods to be 
stowed as often as possible in the units in which they will be 
issued, even though this necessitates the breaking of units in 
which received. The time element, however, is less important 
when goods are received than when they are needed for deliv- 
ery, and many similar packages may be made up at one time 
with less time and effort than the same quantity handled singly. 

Piling 

In the area to be filled, such as a platform space or a bin, 

stowing should begin at the back left-hand corner, and carried 



STOWING MATERIAL 177 

on vertically until one column is completed. Thus the first of 
a row of such columns is brought to the front and cornpleted 
before a new row is started. The second row of columns 
begins as did the first, in the farthest left-hand corner of the 
remaining available space, and is built up or tiered, in the same 
manner. 

Where economy of space is less important than economy of 
time and effort, goods should be tiered only as high as an 
ordinary man can reach. Five feet to the top of the next to 
last tier is a normal height for packages not exceeding lOO 
pounds. Where it is possible to choose between cubical and 
pyramidal piling of goods, the cubical method is to be pre- 
ferred, because stocks are then easier to inspect and count and 
because of economy of floor space. The only advantage of 
pyramidal piling is that it is then simpler and easier to secure 
stable tiering of cylindrical or other rolling articles, such as 
cans, by bracing the bottom tier only of each stack. 

Counting 

For convenience in counting it is a rule of good storage 
for full columns, stacks, and blocks of any one item, to be kept 
uniform for that item. Only the last column, stack or block 
may remain incomplete and contain odd quantities. Besides 
being an aid in handling and making carelessness more notice- 
able, such uniformity greatly facilitates the accuracy and speed 
of inspection. So far as possible, stores should indicate their 
own count. Hence the importance of uniformly regular 
columns, stacks, and blocks. This is the chief reason for 
preferring cubical to pyramidal piling. While the quantity in 
a full pyramid is easily calculated by mathematical formula 
(quantity in a full stack equals the product of the number on 
the bottom tier times the number of tiers plus one divided by 
two) difficulties arise as soon as a portion of the pyramid is 
removed. It should not be necessary to count each article to 



178 PRINCIPLES OF CONTROL 

find out how many are left. Piling in uniformly regular 
columns, stacks, and blocks, with only one last column, stack, 
or block containing an odd quantity, is the obvious solution 
of the problem of easy count. 

For the same reason, the use of easily calculated decimal 
units for the quantities in blocks, stacks, columns, and some- 
times packages, is desirable. Packages and single articles 
may be piled singly if there are not more than ten, but other- 
wise only in multiples of five. Beyond this the columns are 
made as high as the space will permit but of whole groups of 
five only. Groups are not broken to fill in a space too small 
for a whole group. Thus every column of articles small 
enough to be piled in groups of five will contain some multiple 
of five and will be uniform for that article. For instance, if 
a bin holds 24 packages of letterheads piled snug to the top, the 
column should be made up of 20 packages only, viz., four 
groups of five each. 

Removing Goods 

The rules as to the removal of goods should state that when 
more than one lot of any item is on hand, the lots are to be 
drawn upon and exhausted in the order of their age, commenc- 
ing with the oldest unless a particular reason exists for chang- 
ing the practice in the case of an individual issue. Of any one 
lot, the last goods to be put in place are to be removed first. 
Further removals are continued in that order — the reverse to 
that in which they are placed. Clerks should also be instructed 
that where goods have been concentrated by stowage in side 
or in main aisles between previously filled rows, removal must 
be made first from the aisle spaces. No goods must be removed 
from a regular row until all adjoining aisle spaces have been 
entirely cleared. In like manner, incomplete columns, stacks, 
and blocks should be exhausted before complete ones. 

In removing goods from storage in a pyramidal or a cubical 



STOWING MATERIAL 



179 



block, the instructions should be for removals to be made stack 
by stack from the front — the reverse order in which piled. 
Thus there will be but one incomplete stack at any one time, 
all stacks behind the front one being complete. Removals 
from any one stack should be tier by tier from the top, so as 
not to disturb existing stability or to weaken any brace at the 
bottom tier. 

Change of Location 

Whenever the main location of an item is changed, notice 
should be given to the stores records clerk so that the proper 



STORES SYMBOL 




OUaHTITV OP UNITS INVOLVBD | 




OUftHTITY 


UNIT 


NOTICE TO STORES RECORDS DEPARTMENT OF THE 

CHANGE OF LOCATION 

OF THE STOCK DESCRIBED BELOW 




FROM 


TO 


NEW B(HTAOSM*Oe OUTW 


OLD LOCATION 


NCn LOCATION 


SIGNED 


DATE 


jTones ftcooQO 









Form 31. Notice of Change of Location of Material. (Size 5x3.) 



location may be stated on the stores records and on the sub- 
sequent requisitions to be filled. Form 31, notice of change 
of location, serves that purpose. Made out and signed by 
the storeskeeper who makes the change, it is sent to the stores 
records clerk and the new location noted on the stores ledger 
sheet. When the change is being made, the stock can be in- 
ventoried and the old bin tag checked with the stores records. 
A new tag records the inventory and continues the service 



l8o PRINCIPLES OF CONTROL 

begun by the old. Form 31 may also be used when reporting 
the location of new material received for the first time. 

Verifying Inventories 

For the verification of the inventories, if the number of 
items warrant the specialization, a special clerk should be 
appointed to do nothing but count the quantities for comparison 
with the records. If an employee cannot be profitably occupied 
with this work, it should be a part of the regular duties of the 
storesroom attendant. In the course of a year such a verifica- 
tion should cover every item once at least, and it is better to 
complete the cycle every six months. When this is done it is 
unnecessary to shut down the plant specially for the purpose 
of taking inventory. 

The Delivery System 

Various methods are employed for the delivery of stores 
to shops and offices, ranging from the practice of a foreman 
sending the office boy or a workman or going himself to the 
storesroom whenever anything is required, to the handing over 
of all deliveries to the storesroom on the mail-order plan. This 
last method is preferable for various reasons : 

1. It compels the various departments to determine their wants 

in advance. 

2. It saves the time of employees making a long trip and pos- 

sibly waiting in line at the storesroom to receive a small 
item. 

3. It enables the storeskeepers to work uninterruptedly without 

confusion. 

Under this plan a stores clerk is able to take a dozen or 
more requisitions for one material or for materials located 
together and fill all requisitions at or near one place. When 
the items called for are sorted in the delivery room, the deliv- 
eries to departments can be planned for at the same time, thus 



STOWING MATERIAL 



I8I 



making one delivery serve the purpose of half a dozen or more. 
This plan results in such a material gain in the speed Of filling 
requisitions that it cuts down the work of delivery clerks by 
at least one-half. 

The mail-order delivery method requires a department, as 
soon as the need for a material is determined, to forward a 
stores requisition to the storage 
department. The first thing 
the storage department does is 
to make out a move tag illus- 
trated on Form 32. This tag- 
is perforated into two parts and 
both parts show the symbol of 
the material, the charge, and 
the point to which the material 
is to be moved. The coupon 
also provides a space for the 
signature of the person receiv- 
ing the material from the de- 
livery man. The tag is first 
attached to the requisition until 
the material is taken from the 
bin, when it is attached to the 
removed material. Form 48 
(page 231) can also be used 
as a move card for delivering 
the material. If the material is 
not required at once, the requi- 
sition should be filed in a tickler 
file until the day previous to the delivery date. 



/deliver to 

{ (£ 

DEPT. ^— ' 




MATERIAL SYMBOL 


OUANTIT/ AND UNIT 


DESCRIPTION 




CHARGED TO 


FROM 


TA.O MO, 

9763 


MATERIAL SYMBOL 


9765 


QUANTITY AND UNIT 


DESCRIPTION 




CHARGED TO 


DEUVERED TO 


D 


QCLIVERV «»OIMT 


RECEIVED BY 


DATE 


Form 32. Stores 
(Size 2^ 


E 


elive 


ry Tag. 



Procedure in Filling Requisitions 

The first work of the storesroom in filling a requisition is 
to ascertain the location of the material if not stated on the 



1 82 PRINCIPLES OF CONTROL 

requisition, and, before removing the material from its storage 
space, to deduct the quantity wanted from the balance shown 
on the bin tag. When the entry is made, the proper amount of 
material from the oldest lot is removed, and the clerk initials 
the requisition as proof of the issue of the material deducted 
from the bin tag. The requisition is then forwarded to the 
stores record for making the entries thereon. 

If there is not sufficient material on hand to fill the amount 
required by the requisition, a supplementary requisition for the 
balance undelivered is made out by the stores clerk, and kept 
until a new stock of material is received. In this case, the entry 
on the original requisition is changed to show the actual amount 
issued. 

In the delivery room the move tag is securely attached to 
the outside of the package. When the trucker delivers it, he 
obtains the signature of the recipient on the coupon, which is 
returned to the stores department for filing by serial number 
for a few days for reference in case of dispute of delivery. 
The stub remains attached to the package or the stores items 
for purposes of identification until the articles are required 
for use in the factory. The foregoing procedure of course is 
applicable only to conditions in a large plant. 



CHAPTER XV 
TAKING INVENTORIES 

Steps in Establishing Materials Control 

Although the theory and methods of maintaining materials 
control and the workings of the stores system have been dis- 
cussed in detail in the preceding chapters, the steps to be taken 
in establishing this control have not been stated. A most 
careful procedure is required for both the concern which has 
had some materials control and the concern which has had none. 
The steps to be taken in establishing adequate control are 
as follows : 

1. The conditions to be fulfilled by the control mechanism must 

be thoroughly analyzed so that the problems may be clearly 
recognized. 

2. The various methods of control must be studied so as to 

fit the system to the conditions. The system chosen and 
its details must be written up in manual form so that it 
may be permanently established and understood by all 
concerned. 

3. A control organization must be organized, and the members 

drilled and trained in the duties which they are to per- 
form. 

4. Records, requisitions, receiving reports, credits, and other 

stores forms must be prepared and issued to all parties 
who are to use them. 

5. The records, with headings properly filled in, must be made 

read'/ for entry of the details to be gathered together from 
various sources or to be compiled for the first time, 

6. A physical inventory must be taken in order that the initial 

quantities to be entered on the stores records as being on 
hand, on order, and so on, may be accurate. 

In preceding chapters the methods of handling each step 

183 



1 84 PRINCIPLES OF CONTROL 

have been detailed, except the last — the taking of physical 
inventories. 

Necessity for Taking Inventory 

Inventories always have been and always will be taken in 
every concern regardless of the particular system of materials 
control in use, or whether any at all is in operation, because an 
inventory must be taken at least once a year, at the end of the 
fiscal period, in order to compile the annual balance sheet and 
profit and loss statement. These two statements, of course, 
are necessary to show the financial results of the business for 
the period and for tax purposes. 

While the term "inventory-taking" usually is understood to 
mean the taking of a physical inventory or the counting and 
listing of every item to be included, the term frequently is 
intended to mean "book inventories," which is the totaling of 
the items shown by the stores records to be on hand. 

In an earlier chapter the reasons for securing monthly 
financial statements were given and it was stated that unless 
a perpetual inventory or stores record is maintained, a physi- 
cal inventory is required as often as the statements are pre- 
pared. If a complete accounting and cost system, including 
stores control as described, is operated, the materials control 
account values are known at all times by virtue of the stores 
routine. If a complete system is not operated but stores con- 
trol is, then a periodic book inventory furnishes adequate in- 
ventory values of materials in stores but not in process. The 
latter must be found by actual count or from adequate pro- 
duction control records such as are described in Chapter X and 
in Part III. 

Physical Inventory 

The advantage of the stores record in connection with this 
work is easily seen. However, even though a perpetual inven- 



TAKING INVENTORIES 1 85 

tory is kept, physical inventories should be taken from time 
to time to check the perpetual inventory and the material con- 
trol accounts in the general ledger. 

Taking a physical inventory usually has been a matter to 
be dreaded and hurriedly completed — the more quickly com- 
pleted, the better — with correspondingly inaccurate and un- 
satisfactory results. After the stores records have been started, 
the work involved in a physical inventory can be distributed 
by counting, weighing, or measuring a few items daily or 
weekly until each item in the entire storesroom has been inven- 
toried and checked, perhaps several times during the year. 
Besides, counts can be made of specific articles upon the request 
of the control clerks now and then, such as when an item is to 
be reordered. Several other methods have been described in 
previous chapters. 

Whenever discrepancies are located between the book 
amount and the physical count, they must be immediately cor- 
rected, as stated in Chapter V. If the physical count shows 
less on hand than the record, a regularly approved requisition 
is used to credit the materials account and to charge the "Loss 
in Inventory Adjustment" account for the quantity and value 
involved. If the count shows more on hand, a stores credit is 
used with the opposite debit and credit. The inventory adjust- 
ment account should be carried directly into the general profit 
and loss account. 

Advantages of Regular Checking Counts 

Because of this systematic round of counting, and such 
correcting as is necessary, the inventory records can be relied 
upon with assurance at all times. Accurate book inventories 
may be taken quite frequently to check the control accounts 
as inventory-taking then consists in merely taking an adding 
machine list of the balances. 

In fact after the perpetual inventory has been in operation 



1 86 PRINCIPLES OF CONTROL 

a sufficient length of time that reUance may be placed in 
its figures, if regular checking counts are made of the stores- 
room, and suitable production progress records are kept, a book 
inventory is adequate for most concerns for making up any 
financial statements ; and the complete physical inventory with 
its attendant shutdow^n may be eliminated. 

The further advantages of this method of inventorying can 
be readily seen, if it is realized that every plant closing one 
week for inventory loses 2% of its entire productive capacity, 
and during this period, fixed charges are continuing just as 
high as though the plant were in operation. Plants suspending 
for periods longer than one week for inventory lose a propor- 
tionally greater percentage of capacity. Furthermore, the 
organization will be found less efficient upon reopening. 

The Duplicate Tag Method of Taking an Inventory 

In some plants it is almost impossible to take a physical 
inventory of material in process for checking of records while 
the plant is in operation. In such cases and in others, such as 
upon the starting of the materials control system, the taking of 
a complete inventory will be usually regarded as something to 
be completed in haste because of its distastefulness. Further- 
more, in many cases an inventory is regarded of relative slight 
importance and the work will not be planned and co-ordinated. 
Few inventories are accurately taken. When this fact is rec- 
ognized, the responsible authority often orders the work to 
be repeated, thus lengthening the total time and increasing the 
distastefulness and expense. 

This unpleasantness is unnecessary. The method to be des- 
cribed eliminates that unpleasantness and makes inventory- 
taking no more difficult than, and as accurate as, any clerical 
routine. This method known as the "duplicate tag method" 
of taking inventory is based upon the careful planning of all 
details involved in the work. 



TAKING INVENTORIES 1 87 

Preparations for Inventory 

Preparations should be begun long before the inventory 
time and carefully explained to every party who is to be con- 
cerned with the task. The work for each department is care- 
fully laid out, and then each person in that department is 
assigned a definite job, instructed in it, and told under whose 
direction he will act. When these instructions and methods 
have been learned and used, it is of great advantage to con- 
tinue to use them year after year, or until such time as a better 
method is evolved and substituted; thus it becomes a matter 
of habit and everybody is able to do a better and quicker job 
because of the experience of the previous year or years. 

The steps in this method are as follows • 

1. Writing and issuing the inventory instructions. 

2. Making ready the inventory tags. 

3. Counting, vi^eighing, and measuring the inventory. 

4. Comparing the inventory v\^ith the records. 

5. Pricing the inventory tags. 

6. Extending the inventory tag values. 

7. Listing the inventory. 

8. Totaling and comparing the inventory with the control ac- 

count. 

Inventory Instructions 

The inventory instructions should be worded clearly, type- 
written or printed, and issued in sufificient time that they may 
be thoroughly understood by all parties receiving copies. Pro- 
vided there is a sufficient number to be engaged in the inven- 
tory work, it may even be advantageous to conduct a school 
for their instruction. This usually is necessary only during 
the first use of this set of instructions. 

Inventory instructions should be written in such a way 
that each party receiving a copy may have a complete story 
of what his work is to consist and how it ties in with the in- 
ventory as a whole. This can best be done by grouping the 



1 88 PRINCIPLES OF CONTROL 

special instructions for each department separately, following 
the narration of the general instruction applying to all depart- 
ments. These general instructions pertain 



1. The length of the inventory period. 

2. The personnel to take the inventory. 

3. The articles to be inventoried. 

4. Special departmental instructions and preparations. 

5. The details of hov^ to make the count. 

Inventory Period 

The inventory period should be as short as possible. While 
it is important that the starting and finishing dates be clearly 
defined it is most important that the "as of" date be thoroughly 
understood by all. The work can be done in some departments 
in a day or two easily while in others it may require a week 
or more, depending upon the amount of work to be done. In 
the latter case, additional workers should be used to shorten the 
necessary time. 

Each department should cease all operations, so that no 
confusion may be caused to those doing the work. Where the 
production of a department is absolutely required for current 
work, special pains should be taken to complete the depart- 
ment's inventory, so as to resume operations at the earliest 
possible time. If necessary, inventory can be taken without 
the department shutting down; but it is not desirable. Natur- 
ally, storesrooms present little difficulty in this respect. 

Directing and Taking the Inventory 

Any work, to be successful, should be under the exclusive 
direction of some responsible party; taking inventory is no 
exception. Ordinarily the financial interest in the inventory- 
taking is the strongest. Accordingly, the controller or corre- 
sponding executive is usually the supervising authority in 
charge. He should have assisting him, as the active members 



TAKING INVENTORIES 1 89 

of the inventory personnel, the various department heads, such 
as the control manager, materials supervisor, general stores- 
keeper, general superintendent, and the various foremen and 
other department heads and supervisors — both of the factory 
and the facilitating departments, such as the accounting, pur- 
chasing, shipping, receiving, and so on. In fact, inventory 
is a matter affecting every department of an organization; and 
each department head should be thoroughly drilled in his 
responsibilities so that no department may fail in its part of 
the work. 

For the active inventory work of counting, measuring, and 
so on, foremen or other responsible heads pick their shop 
clerks, inspectors, and members of their departments who are 
most familiar with the material to be taken and who can be 
relied upon for accuracy and thoroughness. Clerical depart- 
ments, such as the purchasing department, assign their duties 
to members performing routine work most closely related to 
the inventory details. 

Classification of Items to be Inventoried 

The instructions should clearly define and locate what is to 
be inventoried, under such broad classifications as general 
stores, finished products, work in process, and so on. Further 
definition may be made of the specific items or classes of items 
within each general classification. Usually only materials will 
be inventoried, as it is unusual to inventor)^ fixed assets, such 
as machinery, furniture, and equipment, since their records are 
subject to only occasional error. The inventorying of these 
fixed assets usually consists of checking the plant investment 
records against the equipment located in each department. 

Special Instructions for Departments 

Each department's special instructions and preparations 
should be carefully defined so that each may have a definite 



190 PRINCIPLES OF CONTROL 

task and every detail may be definitely assigned to some depart- 
ment. The duties of the various departments are as follows : 

Receiving Department. The receiving department is 
to clear its floors of all goods received up to the inventory 
"as of" date. Receiving reports covering such goods are to 
be completed and quickly forwarded to the materials control 
department, while the goods are forwarded to the storesroom 
to be included in their count. Goods received after the inven- 
tory "as of" date are to be kept in the receiving room but are 
not to be confused or included in the inventory. However, 
they may be unpacked and the reports made out ready for 
the resumption of routine. 

Materials Control Department. The materials con- 
trol department is to clear up all clerical work connected with 
requisitions, credits, receiving reports, and other stores forms, 
so that the records may be up to date. All forms must be 
forwarded to the proper departments for them to complete 
their work. The department must be prepared and ready for 
comparing and pricing the inventory reports when received 
from the inventory-takers. 

Storesroom Department. The storesroom department 
is ordered to clean up, to sort and stack its material, and to 
place all articles in proper receptacles, marked so as to be 
readily identified, and any requisitions, credits, and so on, 
promptly forwarded. Scrap and obsolete material is weeded 
out and sent to the salvage department. In other words, the 
department is to make certain that all materials are stowed 
in accordance with standard practice. Deliveries from stores- 
room to factory should cease or slow down several days prior 
to inventorying. 

During the inventory period this department inventories 
on inventory tags, as described later, all the materials in the 
storesrooms. 

Manufacturing Departments, The manufacturing de- 



TAKING INVENTORIES I9I 

partments must clean up all spoiled, defective, or scrap ma- 
terials in process, repairing what can be repaired and forward- 
ing the rest to the salvage department ; sort and bring together 
all like job numbers; put all articles in proper receptacles; 
complete all jobs which can be completed; and bring all work 
in process which cannot be completed as near completion as 
possible. In short, the manufacturing departments make a 
general "house-cleaning," by which the amount of material 
on the floors is minimized. Manufacturing departments should 
minimize requests for materials during the days immediately 
preceding the beginning of the inventory period, because each 
item on the floors at inventory time must be covered by an 
inventory tag. 

Inspection Department, The inspection department 
inspects and forwards before the "as of" date all materials in 
the inspection cribs and in process, in order that the stage of 
completion of all materials in the manufacturing departments 
may be officially determined. 

Salvage Department. The salvage department must 
classify all materials in its possession according to condition, 
before making out inventory tags. Material which cannot be 
corrected is sent to the scrap storehouses ready for resale. 
If scrap can be corrected, it is retained in the salvage depart- 
ment until inventory is completed, when it is transported to the 
proper department for correction. 

Purchasing Department. The purchasing department 
is urged to minimize the amount of material received during the 
inventory period, and to restrict to bare necessities the material 
to be received prior to inventory time. The department draws 
up a list of unfilled purchase orders and contracts, arranged 
according to part numbers or names of material, as of the 
inventory date, for the materials control department to check 
the "on order" section of the stores records. Outside concerns 
which have in their possession certain materials, tools, patterns, 



192 PRINCIPLES OF CONTROL 

etc., belonging to the company which is making the inventory, 
are requested to submit statements covering such articles. 
They may be also requested to furnish a list of the above assets 
which have been shipped back to the company a certain num- 
ber of days prior to the inventory date, so that any items in 
transit may be determined. 

There must be a complete agreement and understanding 
between the purchasing department and the general accounting 
department regarding vendors' invoices. All invoices for goods 
received before the inventory "as of" date must be recorded 
and charged to the materials control accounts as the goods will 
be inventoried. 

If sellers' invoices have not come in, memorandum invoices 
are made out by the purchasing department and sent to the 
accounting department for goods received in stores. Goods 
covered by invoices passed for payment prior to the inventory 
date and recorded on the books are considered as a part of 
the inventory even though not yet received. All purchase 
invoices in dispute are promptly adjusted with vendors and 
sent to the accounting department for entry. All invoices 
which have been received for goods still in transit should be 
segregated and listed separately. These may or may not be 
taken into inventory, but it is sometimes good practice to do so, 
as goods shipped f.o.b. seller's works are technically the 
property of the buyer. 

Sales Department. The sales department furnishes the 
accounting department with a list of all products billed but 
unshipped, and of all products shipped but not billed prior to 
the inventory date. Proper adjustments in the inventory 
"totals" must be made by the accounting department for these 
amounts. 

General Accounting Department. The general ac- 
counting department must have its routine work strictly up to 
date, together with calculations of proper amounts by which 



TAKING INVENTORIES 193 

the inventory totals as taken from the inventory tags are to 
be adjusted. These amounts are those just discussed, the 
value of products billed but unshipped, and so on. 

If the general accounting department supervises the taking 
of inventory, it will control all inventory tags and sheets. 
Acting in this capacity, it will charge the tag-writers with the 
tags and sheets as issued and credit them with returns. The 
fact that tags are serially numbered helps the general account- 
ing department to keep its records straight. 

When inventory has been taken, tags are returned to this 
department. Then they are checked by serial numbers, and 
are forwarded for pricing either to the cost accounting depart- 
ment for work in process, or to the materials control depart- 
ment for materials in stores. 

After being priced and compared with the records, the tags 
are again received by the general accounting department for 
extension and listing on the inventory sheets. The sheets are 
then totaled by controls, adjustments recorded, and retotaled 
ready for the final comparison with the control accounts in the 
general ledger. 

Cost Accounting Department. The tags which the 
cost department receives from the general accounting depart- 
ment are matched with the work in process records for com- 
paring the inventory quantity with the record quantity and for 
pricing the tags. To reckon prices quickly, the cost files must 
be up to date. More is said of this later. , 

Inventory Tags 

The employees who are to perform the actual counting, 
measuring, and weighing of the inventory, should work in 
teams — one member to write the inventory tags, the other to 
supply the information. Each must be thoroughly familiar 
with the general methods in use and any peculiar conditions 
and instructions for the department he covers. 
13 



194 



PRINCIPLES OF CONTROL 



Sample forms of inventory tags for raw materials and 
supplies, finished product and component parts, and work in 
process are shown in Forms 33, 34, and 35 respectively. Most 



iMVPNTAov rmiNTrns TAfi r J nn 









MATERIAL & SUPPLIES 










1 










CHf 9HC0 BV 


IN 


IN 


IN 


TOTAL 








































^ 


STORES RECORD QUANTITY | 


PHYSICAL COUNT 




REPOOTCC 


' ACCBPTtD 




VAlUt 










J 






















OUT 


OUT 


OUT TOTAL 





























































































































































Form 33. Inventory Tag for Raw Material and Supplies (face and reverse). 

(Size 33^x71^.) 

of the data on the tags is self-explanatory. Forms 33 and 34 
are practically alike. Provision is made for the movement 
of material "in" and "out" of stores after the first count is 
made, which may be several days before the inventory date. 
Form 35 for work in process needs slight explanation. When 
all pieces of the lot of material being inventoried have not 



TAKING INVENTORIES 



195 



passed through the same operations, one tag must be used for 
each quantity showing a different stage of completion; other- 
wise one tag is used. Assuming that the standard operations 





^ 












FINISHED PRODUCT 
OR COMPONENT PART5 








B,. 








IN 


IN 


IN TOTAL 
















































STORES 


RECORD QUANTITY | 


PHYSICA 


. COUNT 


UNIT COST 


INVENTORY 


REPORTED 


ACCEPTED 










J 






















oirr 


OUT 


OUT TOTAL 








































1 








































































































1 





Form 34. Inventory Tag for Finished Product or Component Parts (face 
and reverse). (Size 3^x 7M-) 

on the work in process being inventoried are known, it is 
sufficient to enter in the designated space only the number and 
name of the last operation. This shows the condition of the 
work in process. If the sequence of operation is not known, 
however, it is necessary to count the number of pieces of work 
in process completed on each operation and to show in detail 



196 



PRINCIPLES OF CONTROL 



the operations completed on that batch. Tag-writers should 
be sufficiently acquainted with the material being inventoried 

as to be able to recognize it 
and know its stages of com- 
pletion so that all details may 



INVENTORV COUNTER'S TAG 



O 



WORK IN PB0CE55 



INVENTORY COUNTEnS TAO 



OESCOIPTION. 
CONDITION (u 



UNfT OF COUNT_ 

FIOST COUNT 

CHECXeP &Y 



MATERIAL 



. PHYSICAL COUNT 



LABOR AND BURDEN 



INVENTORY COUNTERS TAG 

OEPT LOCATION . 



MADE OUT BY_ 



Form 35. Inventory Tag for Work in 
Process. (Size 3^ x 7J4-) 



- be properly described. 



Filling in the Tags 

A supply of the inven- 
tory tags is issued to each 
team of inventory-takers by 
the accounting department. 
When issued, each tag con- 
tains a serial number only. 
At the starting signal the 
workers in the charge of 
foremen or department heads 
commence to count, weigh, 
measure, or size the inven- 
tory items. The count, 
weight, etc., should be reck- 
oned twice before the tags 
are filled out. The "unit of 
count" may be the pound, 
the barrel, piece, etc., but 
preferably is the same as 
the unit of issue. As 



the count is secured, it is written upon the tag by the 
tag-writer. 

The tags are perforated into three sections and are arranged 
with wires for attachment to the material. The necessary 
entries are made on all three sections. As each lot of material 
is inventoried, one tag is attached by the tag-writer to the lot 
and the bottom stub is torn off and sent to the supervising 



TAKING INVENTORIES 197 

authority. If a receptacle is empty, a tag marked "empty" is 
placed upon it. Every tag should be accounted for — none 
should be lost, destroyed, or borrowed. Spoiled tags should 
be marked "void" and sent to the supervising authority. 

Supervising and Comparing Inventory 

As soon as inventory is completed in each department, the 
supervising authority is notified. His representative visits 
the department to see if everything has been inventoried. If 
so, tag-writers and others tvho have been working there are 
released and are assigned, if necessary, to other departments. 
The next step in inventorying is to pull — or detach — the main 
part of the tags, leaving the top section or stub attached to 
the goods. No tags are pulled without the approval of the 
supervising authority. After the tags have been pulled in a 
department, regular operations may be resumed, provided they 
do not interfere with inventory work in other departments. 
Tags pulled are sent to the supervising authority and com- 
pared with duplicate tags. If all tags are not accounted for, 
search is immediately made for the missing ones. 

After the tags have been pulled, they are sorted according 
to the material classifications and forwarded to the cost depart- 
ment or the materials control department for comparison with 
the records and for pricing. The handling of the two classes 
of tags is similar. The work in process tags are then arranged 
in the sequence of the work in process ledger files, and the 
materials and product tags in the stores records sequence. 

As quickly as possible the quantities shown by the tags 
are compared with the quantities which should have been found 
by the inventory counters as shown by the records. If the 
difference is large enough to warrant, a recount is immediately 
requested before the materials can be moved or changed in 
form, the recount being made by someone other than the person 
who took the original inventory. 



198 PRINCIPLES OF CONTROL 

Pricing Inventory Items 

At the same time as the quantities are compared, the unit 
value of the material should be entered on the tag. The inven- 
tory price may be either cost or market, whichever is lower. 
Stores materials are easily priced from the stores records, as 
are requisitions (see Chapter V), except when starting the 
materials control system or when the market price is to be used. 
When starting the system, the price must be taken from what- 
ever records are most convenient or reliable — purchasing de- 
partment records, accounting department records, market quo- 
tations, or estimates of the engineers. As a rule the market 
price is only used when it is lower than cost price, as during a 
period of falling prices, in order to wipe out during the current 
period a loss due to poor purchasing policies. If any price is 
used other than the stores record price, suitable change must 
be made on the stores record in order that future transactions 
may be priced at that value. 

In Chapter X on "The Costing of Orders," the elements to 
be included in costs of production are fully explained. This 
cost is to be used in pricing the work in process tags. In most 
cases it will mean reckoning the total of the time cards, requi- 
sitions, and other cost papers which, if the costs are handled 
as described in Chapter X, the preferable method, are filed by 
order number. 

Final Steps 

When the tags are all priced, they are returned to the ac- 
counting department for extension, which should be done 
twice to insure accuracy. They are then arranged by materials 
control account, by serial number, and under the direction of 
the supervising authority are listed upon the inventory record 
sheets (Forms 36 and 37). 

These records are then added, the necessary adjustments 
entered as described above, and the net totals compared with 



TAKING INVENTORIES 



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200 PRINCIPLES OF CONTROL 

the ledger accounts. Differences are journalized to Profit and 
Loss. 

This completes the description of taking inventories — a 
not unpleasant job when carefully planned and co-ordinated 
by a supervising authority who realizes its importance and the 
importance of planning before acting^. 



CHAPTER XVI 

ORGANIZATION OF THE MATERIALS CONTROL 
DEPARTMENT 

Summary of Responsibility- 
While the work incident to the control of materials has 
been discussed in detail, so far little has been said about the 
internal organization of the department responsible for its 
performance. The functions to be performed may be reviewed 
before taking up the discussion of the organization which 
performs them. 

The function of control may be summarized in the five 
steps of : 

1. Determining the probable materials requirements. 

2. Securing and storing an adequate supply. 

3. Issuing and delivering stores as wanted. 

4. Recording all stores transactions on suitable records. 

5. Furnishing the data for cost and financial accounting relat- 

ing to stores. 

This enumeration summarizes in skeleton form the entire 
function of materials control, in which is centralized the 
scattered efforts which the several departments of the organi- 
zation may have been making to control materials. 

Relation of Storeskeeping to Other Functions 

As developed in previous chapters, the storeskeeping func- 
tion occupies a position of service in the organization of the 
business as a whole, equal to the personnel or the inspection 
functions. Like them, it should be responsible to the head of 
the manufacturing organization, as the production departments' 

201 



202 PRINCIPLES OF CONTROL 

results depend to a large extent upon the furnishing, when and 
as wanted, of the materials required in production. 

Relations with a Production Control Department 

As discussed in Chapter II, the stores records are a part 
of the production organization's tools. The materials control 
department should become a part of the production control 
department in any concern having a real production control 
department. Such concerns at present are few in number, but 
they are growing, since complete production control is of vital 
importance to production success. This will be appreciated 
more fully after the study of Part III, and the reader will 
see what work is added to materials control to form a complete 
production control department. 

Co-operation between the Storeskeeping Groups 

The two distinct phases to the task of storeskeeping — the 
clerical and the physical — demand different qualifications of 
the employees. The clerks handling the stores records check 
the storage clerks, recording what they have done and should 
do. At the same time the second group, although its work 
is largely physical, has its records necessary for its own infor- 
mation in performing its work and which at the same time 
serve as a check on the purely clerical group. 

Co-operation between the two groups can be obtained 
through friendly rivalry and mutual assistance in the difficul- 
ties which arise in the ordinary routine work — and difficulties 
occur frequently enough. It is best, especially in a high-speed 
concern, to have the two groups under the same head, so long 
as he is trustworthy and reliable and capable of keeping the 
two kinds of work distinct and separate and at a high state 
of efficiency while securing the necessary co-operation. 

In a large concern each kind of work will require a suffi- 
cient number of employees and space to make an easily 



MATERIALS CONTROL DEPARTMENT 203 

administered force, and the securing of a specialist to head 
each of the two kinds of work will not be a useless expendi- 
ture of money. Even in a small concern, it is almost necessary 
for efficient administration to have a "general storeskeeper" 
responsible for the storage group to the materials control 
supervisor, while the materials control supervisor continues as 
the active head of the clerical group. 

Communicating between the Two Groups 

The two stores divisions in some organizations are located 
next door to each other for easy communication. The clerical 
control group will require a very small amount of space as 
compared with the storage group, and in a compact organiza- 
tion it is a convenience for it to occupy a corner of the main 
storesroom. Where, however, the plant is extensive, it is more 
important for the clerical division to be closer to the planning, 
cost, and other factory office departments than to the storage 
division, as reference to the records is frequently made by the 
other departments with need for a speedy answer. 

Wherever the two stores divisions may be located, some 
method of speedy communication between the two is required 
for a quick passing of papers when emergency matters require 
attention. Any method of communication may be employed 
which is convenient and certain. Some organizations use 
overhead basket carriers, others a scheduled messenger service, 
or again a pneumatic tube system may be installed. Mechanical 
methods afford a much more frequent and satisfactory service 
than can be maintained by messenger. In a large organiza- 
tion using the tube method, a tube is sent as soon as papers 
collect to fill one and messages pass continually to and fro. 

Organizing the Materials Control Department 

The internal organization of the materials control depart- 
ment should be laid out along functional lines, the principles of 



204 PRINCIPLES OF CONTROL 

the division of work corresponding to the duties to be per- 
formed and the possibihty of placing each duty in charge of a 
responsible head. Such separation of duties along functional 
lines creates what are called "sections.'' 

While in this discussion the control work is assumed to 
be sectionalized internally by operations into a larger number 
of sections than would be necessary in a small concern, the 
basis and the need for such an organization in some plants 
should be visualized and understood even though the volume of 
work in most plants is insufficient to justify establishing all of 
the various sections. The relationships or duties shown on the 
chart in Form 38 exist in every stores organization even if it 
requires but one person to conduct the entire work. As the 
departments increase in size and importance, they can be 
divided into the sections required for proper control purposes. 

Functional Organization 

It is not out of place briefly to consider the chief advantages 
of organization along functional lines. First, it leads to the 
development of specialists and the centralization of each kind 
of work under one responsible head. Secondly, the individual 
is assigned to the particular job to which he is best fitted. If 
he has the ability and inclination to advance, he has ample 
opportunity to learn the work of all the sections. The head 
of each section, like the head of the entire department, is 
selected with a view to his ability to control the conduct of 
the entire work of his section. He plans all the special or un- 
usual work to be done and sees that it is properly carried out. 
The routine work, once established and put in operation, takes 
care of itself so long as conditions remain the same. 

While the sectional organization permits the head of each 
section to exercise a certain amount of authority over its 
routine, with the necessary assumption of responsibility for its 
success, any question or matter involving departmental policy 



MATERIALS CONTROL DEPARTMENT 



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206 PRINCIPLES OF CONTROL 

is referred to the department head. Thus the heads of the 
sections are the right-hand men of the department head. 

Function of the Planning Section of the Stores Records 
Division 

The most important section of the control department is 
the planning section. This section first receives all stores 
requisitions, stores returns, and authorizations to stock from 
whatever source they arise. Upon receipt these are checked for 
completeness and for the correctness of the items called for. 
For instance, a stores requisition should be correct as to the 
account symbol to which the material is to be charged, 
the quantity and unit desired, the material's symbol and defini- 
tion, the delivery time and the delivery point, and the signature 
of the party approving the requisition. While checking these 
items the clerk can at the same time sort them by the class of 
material required. In this way each stock of requisitions is 
ready for the clerk working on the stores records for that class 
of material. If any item is incorrect and cannot safely be 
corrected by the checker without changing the spirit of the 
order, he must return it to the originator for correction. 

The planning section also carefully checks the authoriza- 
tions to stock (Form 9, page 55) or stores requisitions for 
unclassified material before releasing them in order to deter- 
mine whether standard material cannot be substituted for the 
non-standard material ordered or to determine if any material 
in the by-product stores would answer the purpose. Here the 
head of the planning section will doubtless have to consult the 
department head who has ordered the material. 

If the request to stock is approved, the planning section 
sets the ordering point and ordering quantity, classifies and 
symbolizes the material in the general scheme of standardiza- 
tion, establishes a unit of issue, secures a specification, and 
determines whether the material is to be purchased or manu- 



MATERIALS CONTROL DEPARTMENT 207 

factured. The planning section also determines the particular 
storesroom to which the material is to be delivered upon receipt, 
if it is necessary to store it elsewhere than in the general stores- 
room. All this information is entered on the authorizations, 
after which they are distributed to the recording section for 
preparing a stores record sheet and ordering the necessary 
quantity. 

Changes in standards, symbols, and specifications should 
be made only on the approval of the planning section. The 
control of inventory should be centered in this section through 
the periodic reviews of the ordering points and quantities. 
Estimates or specific orders showing requirements of materials 
during coming periods are received by the head of the planning 
section and translated into terms of quantities of finished 
products, component parts, and raw materials and supplies 
ready for posting to the requirement columns of the stores 
records. 

When purchase or production order requisitions have been 
written from the data on the records and then checked, they 
should be forwarded to the planning section for its final 
approval of the requisition of a new stock of that material 
and of the schedule for delivery. When signed the requisi- 
tions are forwarded to the proper department — purchasing or 
production. 

Rejection reports, covering questions regarding acceptance 
of materials received on orders and referred to the materials 
control department by the inspection department should also be 
handled by the planning section, which investigates whether 
or not the questionable material is acceptable for the purpose 
for which it was procured. This section arranges for taking 
all inventories, both book and physical. In order to control 
the department's work, it is also responsible for any changes 
in departmental routine and procedure in handling the various 
papers. In short, when this section completes its work, the 



208 PRINCIPLES OF CONTROL 

work of the department is closely outlined and would be re- 
duced to routine if new matters did not constantly recur for 
decision. To this section falls the task of removing obstacles in 
the way of the smooth running of the whole department. 

Personnel of the Planning Section 

This planning work requires two types of employees. The 
routine half is covered by such rules and regulations as to 
reduce it to a simple clerical job requiring little originality or 
initiative. The head of the section, however, should be a person 
who is always "on his toes," resourceful, and possessed of 
initiative and reliability. To him must be made known much 
information about the policies of the management and future 
plans of a more or less confidential nature. He must be able 
to recognize the point of view of his employers as well as that 
of the men under him in various questions referred to him for 
decision. Knowledge of the technical features of materials is 
desirable because standardization and specifications are handled 
by his section. He should be in sympathy with this philosophy 
of storeskeeping, since on him depends its success or failure. 

The Function of the Recording Section 

The recording section of the materials control department is 
entrusted with the work of maintaining the stores records, both 
for classified and unclassified materials. This includes the 
responsibility for keeping the supply above the "ordering 
point" and of watching for the "danger point." This section 
also posts all entries to the stores ledger records from requisi- 
tions, stores returns, material received reports, and copies of 
orders. From these papers the work of recording requirements, 
reservations, deliveries, and receipts is performed, those hand- 
ling the work being on the lookout always to see that when the 
"ordering point" is reached an order requisition for the re- 
plenishment of stock is written. 



I 



MATERIALS CONTROL DEPARTMENT 209 

When an authorization to stock is received from the plan- 
ning section, a record sheet is written at once, using data on the 
authorization for filling in the heading on the sheet. The 
proper order requisition is then written and the sheet filed by 
the material symbol among the other record sheets. 

Stores requisitions and returns are priced from the stores 
records at the time of delivery or receipt. If the value of the 
transaction is to be recorded, the requisition or return is ex- 
tended at once and the figures are entered thereon. The 
recording section clerk also checks the ledger sheets each time 
a physical inventory of any material is made or a bin tag is 
received. 

The work on order requisitions consists merely in checking 
the clerical entries and in requesting the storage division to take 
a physical inventory of the stock to make certain the material is 
needed before forwarding the requisitions to the planning 
section for final approval. A copy of the order which results 
from the order requisition is received and checked with the 
duplicate requisition to prevent the possibility of any error 
occurring in writing the order. 

The head of the recording section should be an individual 
who is of a careful type of mind and who is painstaking enough 
to spend the time needed to run down any apparent error in 
his records. He should take pleasure in neatness and in keeping 
his records up to date and in the best condition. His work 
requires little initiative, but much painstaking attention to 
details. 

Function of the Scheduling Section. 

The scheduling section of the materials department is to 
follow up the delivery of orders whenever requested by a 
member of the recording section or other authority, and to see 
that the schedules planned for are maintained. This position 
requires a clerk with some initiative to visit the manufacturing, 
14 



210 PRINCIPLES OP CONTROL 

purchasing, and other departments which have anything to do 
with the procurement of the ordered materials. Only in 
organizations of exceptional size is the work of scheduling and 
following up orders of sufficient magnitude to keep employed 
more than one or two clerks. 

Function of Accounting Section 

The accounting section reckons the values of and tabulates 
the stores requisitions and returns handled by the recording 
section. Its purpose in so doing is (as explained in Chapter X) 
to distribute the charges and credits to the stores accounts and 
to summarize the stores requisitions and returns and the 
material received reports for posting to the control accounts. 
The control totals are reported to the cost department with the 
original papers and the summary distribution sheet. At the end 
of each month the journal voucher is written and forwarded 
to the cost department, covering the charges and credits to 
stores during the period. When physical inventories are taken 
and the inventory sheets have been priced, the accounting section 
extends the individual entries and totals them as a check against 
the accuracy of the balance of the control accounts. 

This kind of detailed clerical work affords little variety 
from day to day, and has few interesting features to relieve 
its monotony. The head of the section should know something 
of the theory of accounting and of the specialized field of cost 
accounting. 

Organizing the Small Materials Control Department 

In all save very large organizations, the scheduling section 
would be combined with the planning section, and the account- 
ing with the recording. These combinations retain the necessary 
checks, but still concentrate similar work without loss in 
efficiency so long as the volume of details is not large enough 
to require high specialization. 



MATERIALS CONTROL DEPARTMENT 211 

Organizing the Storage Division 

The storage division of an extensive plant may be divided 
into three sections, corresponding with the three spaces set 
aside for particular work, as discussed in Chapter XIII, 
"Arranging and Equipping the Storesroom," and as shown 
in Form 39. As in the clerical division, the chief section of 
the storage division is also a planning section whose task is to 
arrange the work of the other sections. It receives all incoming 
stores from the receiving and manufacturing departments after 
they have been passed by the inspectors. It directs the materials 
to the proper storesroom, or to the recipient in the case of 
unclassified materials for immediate delivery. The material is 
receipted for by the planning section signing the materials 
received reports, which are then forwarded to the stores records. 

After reservation, all requisitions are received by the plan- 
ning section from the recording section, and the move tag 
(Form 32, page 181) for that requisition is written at once. 
If the material is wanted immediately the requisition is sent 
to the proper storesroom. Requisitions for material not on 
hand and not calling for immediate delivery are filed in a 
tickler file until time for the delivery to be made. 

The determination of standard methods for storing ma- 
terials and the general layout of the storesrooms are also 
handled by the planning section. All special problems of 
storage are decided by the head of the planning section and for 
this reason he should be a specialist in the methods and applica- 
tions of the principles of storage. Moreover, it is his duty to 
investigate complaints about the service rendered by the stores 
departments, such as the non-delivery of material when wanted. 

The Stowage Section of the Storage Division 

The stowage section is the custodian of stores. Clerks in 
this section receive the materials which the planning section has 
signed for, stow them according to standard methods in the 



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PRINCIPLES OP CONTROL 







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MATERIALS CONTROL DEPARTMENT 213 

proper storage spaces, and safeguard them until requisitioned. 
Then they make the entries on the bin tag, remove the material 
from the storage space, attach the move tag to it, and forward 
it to the delivery section and the requisition to the stores records. 
If there are a number of storesrooms, each should be under 
the control of the head of the stowage section so far as the 
physical work and arrangement are concerned. No work 
requires more careful attention to detail, and the employees of 
the section must be willing and capable of exerting the care 
required. 

The Delivery Section 

The delivery section packs, routes, and delivers the stores 
which the stowage section collects on requisitions. As before 
noted, these may require packing and it is often possible to 
consolidate several items for the same department into one 
package. When the packages are done up and routed, they 
are loaded on the trucks for the deliveryman to take to their 
destination. The main part of the move tag is signed by the 
recipient and is brought back by the deliveryman as the receipt 
for the safe delivery of the material. These receipts are turned 
over to the planning section for temporary filing, until such time 
as no question is expected to arise concerning the delivery of the 
material. 

In the small concern the functions of planning and delivery 
are usually combined. It will be seen that most of the storage 
work is physical and calls for little clerical ability. 



PART III 
PROCUREMENT BY MANUFACTURE 



CHAPTER XVII 

ORGANIZATION OF PRODUCTION CONTROL 
DEPARTMENT 

Function of the Department 

Up to this point the discussion has covered the work of 
materials control so far as concerns the determining of the 
values of the inventories carried in stores and the movement 
of materials, parts, and finished goods into and out of the 
storesrooms. The relationship between the system of materials 
control and the work of the manufacturing departments has 
been indicated only in broad outline, without detailed considera- 
tion of the method of fitting the materials control system into 
the whole scheme of production control. To describe in detail 
the standard methods of production control and consider their 
adaptation to varying conditions of plant and manufacture 
would involve the discussion of principles and methods of 
management that are not properly comprised within the title of 
this book. Both in a small plant making a few simple products 
or producing one type of article, as a foundry, a glass works, 
a twine mill, etc., and in a large organization manufacturing a 
multiplicity of products, the management should bring all cleri- 
cal functions and activities assisting the manufacturing depart- 
ments under one supervising head. A "production control 
department" should be formed of the materials control, order 
or planning, and other related departments, for the purpose of 
gathering the reins of manufacturing management in one 
supervising hand. The materials control department then 
becomes, so to speak, one of the right-hand men of the produc- 
tion control department, as illustrated in the chart shown in 
Form 40. 

217 



2l8 



PROCUREMENT BY MANUFACTURE 



























PRODUCTION CONTROL 
DEPARTMENfT 




PDODUCTION CONTBOL 
MANAGER 










































MATERIALS 
CONTROL DIVISION 




OBDt.'? 
CONTROL DIVISION 




DI5PATCHINQ 
DIVISION 




TOOL 
CONTROL DIVISION 




MATePIAL CONTROL 
5UPlRVI50R 


ORDER CONTOOL 
SUPERVISOR 


DISPATCHING ■ 
SUPERVISOR 


TOOL CONTROL 
SUPERVISOR 























Form 40. Organization Chart of Production Control Department 

The work of the unified production department may be 
divided into three broad divisions, the functions of which are : 

1. To standardize the articles to be produced, the operations 

to be performed, the materials and tools to be used, the 
jigs, fixtures, and gauges required for carrying out the 
operations. 

2. The laying out or planning of the work to be done and the 

formulation of the responsibilities of the departments to 
which its performance is allotted. 

3. The balancing and grouping of men, materials, and machines 

so that the work called for by production, plant, or ex- 
pense orders may be accomplished within a prearranged 
schedule. 



Order Handling Procedure 

Before describing the organization of the production control 
department, it is advisable to give further consideration to the 
orders by means of which work is controlled and the factory 
activities are set in motion. 

It is an axiom of production control that no shop should 
begin any work except by the authority of an order of some 
kind, and that all time spent and materials used must be charged 



PRODUCTION CONTROL DEPARTMENT 219 

to the proper order. The forms and records employed to collect 
these charges will be discussed in following chapters. For 
present purposes it is only necessary to describe the general 
methods of planning the factory activities. The nature of 
the three types of factory orders — production, plant, and ex- 
pense — has been described in an earlier chapter. 

Production orders are based on the estimated sales budget, 
and schedules are originated from the stores records and 
scheduled as far ahead as the nature of the business permits 
for the delivery of specified quantities of finished product to the 
finished stockroom — assuming that the production is for stock, 
as should be the case in every factory manufacturing a standard 
product. The planning of the production orders begins as soon 
as the schedules of production requirements have been drawn 
up. Determining the possibility of meeting the schedule is the 
first step. If the parts or finished products called for are 
standard articles previously manufactured, all the data will be 
on file relating to materials, tools, jigs, and dies, if any, required 
for the work, as well as standard practice records describing the 
nature of the operations required by the order and the time 
necessary to complete them. If the products called for are of 
a new type, the above data must be carefully drawn up and 
made a permanent record, using as a basis such past experience 
on work of a similar kind as will permit the requirements of 
the order to be specified and planned for. The method of 
planning the preliminary work before a production order is set 
in motion is reserved for later discussion. 

Plant increase or plant betterment orders, though few in 
number, require detailed planning in the same way as produc- 
tion orders. They differ from production orders only in two 
ways. As previously explained, they are charged to a suitable 
asset account instead of to finished product, and they are 
initiated by a request received from a department for their 
performance, or the policy of the management calling for 



220 PROCUREMENT BY MANUFACTURE 

certain betterments to be carried out or certain additions to 
the plant, fixtures, patterns, etc., to be made. As a rule plant 
orders are fitted into the production scheme as circumstances 
permit, and they are often issued as a means of taking up the 
slack during dull periods of business. 

Expense orders, as previously stated, are issued for plant 
repairs or for activities chargeable to some expense account. 
Such work is set in motion by the production control depart- 
ment when the necessity arises, whether or not a request may 
have been received for its performance. Such orders call for 
little or no planning and are the simplest kind to handle. 
Usually the work to be done is of a minor character and often 
a sufficient description of the job cannot be secured to permit 
a detailed plan. The control consists in scheduling a worker 
to do the job by a certain time. 

The Production Control Department 

This central department is to become the planning and 
scheduling function for the manufacturing departments. It is 
a production control department in that it is responsible for 
telling "what to work on" as w^Il as "the rate at which produc- 
tion operations are to be carried out." More specifically, this 
function is to co-ordinate the workings of all operating depart- 
ments so that operations of manufacture may be accomplished 
most economically and on schedule. To do this it must have 
control of the stores records, as was stated in the previous 
discussions, and accordingly will take over all the work outlined 
as the function of the department handling the stores records. 

The production control personnel will consist of: 

1. The production control manager 

2. Materials control supervisor 

3. Order control supervisor 

4. Dispatching supervisor 

5. Tool control supervisor. 



I 



PRODUCTION CONTROL DEPARTMENT 221 

together with as many clerks subordinate to the respective 
supervisors as will be necessary for carrying out the work. 
This organization is charted on Form 40. 

The Production Control Manager 

The production control manager is an expert production 
engineer with the technical ability to supervise the methods 
of manufacture and the executive ability to direct the perform- 
ance of the personnel of the production department. As an 
engineer he should be versed in the principles and practice of 
shop control ; as an executive it is his function to co-ordinate the 
production departments' efforts with the actual requirements of 
the business as determined by such schedules of sales and pro- 
duction preferences as are outlined to him by the management. 
In his engineering capacity he should draw up data and statis- 
tics for filing and future use of the total capacity of all pro- 
ductive units; in his executive capacity he anticipates and 
reports available productive capacity, and plans for its efficient 
utilization. Thus his duties comprise not only the planning 
for the work to be done but the supervision of its performance 
and the efficiency of its execution. 

Materials Control Supervisor 

The work of this division has been thoroughly discussed 
in the preceding chapters. With the formation of the produc- 
tion control department, all materials control is incorporated 
herein and becomes the basis of the work of other divisions of 
the department. Nothing further need be discussed regarding 
its work. 

Order Control Supervisor 

The order control supervisor is the scheduler of the pro- 
duction department. He draws up the time-table by which 
materials are delivered to machines, and a steady stream of 



222 PROCUREMENT BY MANUFACTURE 

work is kept in process up to the capacity of men and machines. 
Following the receipt of the requests for production (most of 
which come from the materials control supervisor), he makes 
up the production orders and schedules them in their proper 
sequence upon the "control board" (to be explained in next 
chapter) prior to the dispatching of the work to the production 
departments. He is responsible for seeing that the time a 
given order will be in process is indicated by making out time 
cards which when placed upon the control board serve as signals 
and time-table to the progress and record clerk and to the 
foremen. By means of his control board and its subsidiary 
progress record, he is at all times able to furnish information 
to any party regarding the progress of an order and the 
schedule it is expected to maintain. By his scheduling in 
proper sequence and on the proper dates, he controls the activi- 
ties of the manufacturing departments. 

The record of the progress of shop operations performed 
on parts and assemblies on various orders is connected with 
the maintenance of time standards as materials flow through 
the factory. By means of these comparative records of sched- 
uled standard time and "actual times" of performance, the 
order control supervisor maintains a continuous check on shop 
performance and collects the data required for the revision of 
standard production rates and for the more accurate planning 
of future orders. 

The Dispatching Supervisor 

The function of dispatchers is the dispatching of the cur- 
rent jobs to the departments responsible for their completion 
and the clerical work of the records which can be most con- 
veniently handled in operating departments. They should have 
a complete knowledge of all "jobs being worked on" and their 
"starting times" and "quitting times," as well as "next jobs 
ahead" by preference, and whether the proper instructions, 



PRODUCTION CONTROL DEPARTMENT 223 

materials, tools, and so on, necessary for the successful doing of 
work, are or will be available at the start of "next jobs." Also, 
in co-operation with the foremen, they assist in the development 
and connection of standardized methods and practice, so that all 
question as to "where," "how," and "in what time" jobs are to 
be done are more fully known and are reduced to permanent 
record in writing so classified and filed as to be readily available 
when wanted. The work of the dispatchers is explained in 
more detail in Chapter XIX. 

Tool Control Supervisor 

The tool control supervisor occupies a position regarding 
small tools similar to the materials control supervisor's position 
regarding materials. He is responsible for the storing of all 
small tools, jigs, fixtures, dies, templates, patterns, and draw- 
ings, which responsibility includes the supervision of the tool 
cribs and other storage places. He must plan and schedule the 
use of these tools so that they will always be in working con- 
dition and ready for use. This involves the forwarding of all 
tools needing repairs to the proper department, requesting the 
order control supervisor to schedule that work. If tools cannot 
be available when wanted for production, the order clerk should 
be informed of the fact in order properly to schedule his jobs. 
When new tools are needed, the tool supervisor orders them. 
Another of his functions is to work with the equipment 
engineer and the manufacturing executives in the development 
of new and better tools and machine practice. 



CHAPTER XVIII 

GRAPHIC PRODUCTION CONTROL * 

Necessity for Graphic Method 

The aim of factory management, baldly stated, is to produce 
the largest quantity of product with the minimum expenditure 
of time and effort and with the minimum investment of plant, 
machines, and inventories. In consequence, the most important 
of managerial functions is to regulate the flow of work in 
process through the shops in accordance with this aim. The 
effort of men applied to materials through tools and machines 
must be so co-ordinated that smooth operation is insured in 
every detail between the receipt of the raw material and its 
dispatch as finished goods. To insure this smoothness of 
operation it is not sufficient to have a system of records; the 
system must function properly and the management must be 
acquainted, from hour to hour, if necessary, with the manner in 
which the factory machine as a whole is functioning. This in- 
formation should be visualized in some way. When we ask 
the time of day and somebody replies 12:35, we mentally 
visualize the hands of the clock in a certain position; but a 
glance at a clock is a much quicker method of getting the 
knowledge. Similarly a planning board which visualizes the 
progress of factory activities as a clock visualizes the progress 
of time is a much quicker method of reporting the progress of 
work to the management. For this reason, in modern factory 



^ The procedure described in this and the following chapter has been developed 
by the C. E. Knoeppel organization and is explained in detail in Mr. Knoeppel's work, 
"Graphic Production Control." The principles stated are applicable to all plants, but 
the details described are those of an "equipment type" of production control system, 
such as could be used in the more usual machine and assembly plant manufacturing 
a standard product. Necessarily the procedure must be modified in its details to fit 
the special conditions in each plant. 

224 




Form 41. Control Board 



GRAPHIC PRODUCTION CONTROL 225 

Operation the graphic method has become the standard method 
of control. 

Function or Purpose 

The function or purpose of a definite procedure for 
handling production orders, from their receipt to their final 
completion in the shop, is primarily to produce more parts per 
unit of time — thereby reducing costs — and to meet sales re- 
quirements. 

The key to this is the establishment of standard hourly- 
production rates representing the quantity of production that 
should be produced on each operation in a given time. Inas- 
much as wage, burden, and production rates are directly related 
to time, this is a means whereby not only rates of production 
but also the costs of production may be controlled. 

By use of control boards, dispatch boards, and the related 
auxiliary elements of definite shop control, work may be 
scheduled to the places best able to execute it, as well as being 
scheduled relative to the dependence of successive operations 
on each other. By suitable regular and "up-to-the-minute" 
reports of machine irregularities and idleness, absent operators, 
and other contingencies affecting operations, conditions which 
hold up production, can be quickly remedied and even antici- 
pated. Available productive capacities may be anticipated and 
reported as they arise. Thus, this visualization of current 
operating conditions gives a basis for keeping the investment 
in productive capacities continually producing maximum 
profits. 

The following tabulation presents the various advantages : 

1. A complete production schedule fitted to sales schedules as 

to quantities and as to dates for completion. 

2. A complete control of the inventories of raw materials, 

finished parts, materials in process, and finished product. 

3. A scheduling of all shop production units as far ahead as 

the work ahead will last. 



226 PROCUREMENT BY MANUFACTURE 

4. A balancing of amount of work ahead of various produc- 

tion units so as to maintain proper co-ordination and re- 
lationship. 

5. A complete knowledge of all jobs ahead of various units. 

6. A knowledge that all necessary material is on hand before 

an operation is started. 

7. A knowledge that all necessary tools are on hand before 

an operation is started. 

8. The recording of the progress of an order through the shops 

in order that all parts may be ready for assemblies, both 
minor and major, and may be finished at times wanted. 

9. Recording of the standard time for each operation and the 

actual time of performance, so that a continuous revision 
of standard hourly production rates is brought about. 

10. A recording of the factors of production through charts, 

tables, and graphs so that analysis of variations in factors 
of production may be observed and faults may be remedied. 

11. A continuous reporting to the management of the progress 

of orders. 

12. A collection of data to enable the proper costing of products 

and basis of estimate. 

13. Statistics and tables of comparison, showing production re- 

sults for the month and year to date, for use of manage- 
ment. 

14. An analysis of the causes of results and failures, and the 

corrective measures to be applied if necessary. 

Means or Machinery of Performance 

The production order handling procedure is closely related 
to several means or mechanisms. They are as follows : 

I. Control boards (Form 41), which really are maps of all 
productive units of a shop. They are visible files of time 
cards prior to going into operation in a shop. They allow 
these cards to be scheduled ahead of the production units 
upon which the work is to be performed, in accordance 
with the duration of the operations and the sequence of 
performance. They are the means of showing how close 
the shop is operating to the scheduled standards. 




Form 42. Dispatch Board 



GRAPHIC PRODUCTION CONTROL 



227 



4- 



Dispatch boards (Form 42), for display of the "jobs work- 
ing on" and "next jobs to do" for every production unit 
in a shop. 

Standard machine practice card (Form 43), to be filed on 
the control board opposite the appropriate machine. It 
shows the type, capacity, rating, and power of the machine 
and its specialties. 

Standard parts list records (Form 44), giving complete 
bills of material for each finished product; that is, informa- 
tion as to quantity of each part required, class of material, 
assembly sequence, piece and assembly symbols, symbols 
of blue-print records and production analysis records, and 
so on, for each part or material required. 



DESCRIPTIVE NAME 




LOCATION a SYMBOL 


RANGE 


TOOL CHARTS 


SETTING CHARTS 


POWER 


BELT 


PWR. PULLEY 


R.P.M. 


C-S PULLEY 


R.P.M. 


OPERATIONS DONE 





SPECIALTIES 



QTAIMnARn PRflPTirr ^"'^ '^ ^"^ CORRECT STANDARD PRACTICE FOR ABOVE PRODUCTION 
JIHilUHnU rnHl/MV/E UNIT. ARRANGED THIS WAY FOR QUICK REFERENCE 



Form 43. Standard Machine Practice Card (face and reverse) . (Size 7% x 3^.) 



228 



PROCUREMENT BY MANUFACTURE 











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GRAPHIC PRODUCTION CONTROL 229 

5. Standard production analysis records — one for each part or 

assembly. 

(a) Form 45, showing sequenced operations with auxiliary 

small tool requirements, best and alternate produc- 
tion unit, and standard ratings of set-up, production 
per hour, and so on, for each operation. 

(b) Form 46, showing the quantity in a standard manu- 

facturing lot or batch, raw material requirements, 
and best flow through successive operations. 

6. Blue-prints of all parts laid out in sufficient detail to give 

full working knowledge of the necessary operations to be 
performed. 

7. Stores records (such as Forms 7 and 8, pages 47 and 51), 

showing all pertinent data concerning the material covered, 
the current requirements, the quantities on order, the 
quantities received into stock, and the quantities issued 
from stock as described in Part II. 

8. Progress and follow-up records (Form 47) are the keys to 

control boards and present a means of following pieces 
through the shop, recording machines upon which opera- 
tions are performed, scheduled rates of operation and 
number of good and defective pieces produced. By sig- 
naling the dates at the top, special conditions needing at- 
tention are constantly kept in mind. 

9. Identification, instruction, and routing cards (Form 48), for 

identifying all material in process and later to be used 
as notification of delivery to stores. 
ID. Material requisitions (Form 12, page 72, and Form 49), 
for ordering exact quantities of material to be delivered 
to production units for certain orders. 

11. Material credit cards (Form 16, page 79, and Form 50), 

for returning any excess material to the storesroom. 

12. Time cards (Form 51) are the orders to individual produc- 

tion units, giving operation numbers and descriptions, 
standard production rates, routing of operations, and 
special instructions. After completion of work, these re- 
ports carry such additional information as number of 
pieces finished and actual time of performance. Time 
cards form the basis for costing direct labor, and give a 
means of measuring each operator's and shop's efficiency. 



230 



PROCUREMENT BY MANUFACTURE 





















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GRAPHIC PRODUCTION CONTROL 



231 



. ORDER NO. 


PART OB OROUP 


BLUE-PRINT 


STARTING PLACE 


THIS DATE 


QUAN. ON ORDER 


QUAN. THIS LOT 


NUMBER LOTS 


LOT NUMBER 


STARTED MFR. 


CONTRACT 




TO BE COMPLETEO' ■ 


FINISHED MFR. 





INSTRUCTIONS 
SHOP IDEMTJFICATION AND INSTRUCTION RECORD 




KEEP THIS CARD WITH WORK. UNTIL COMPLETED AND RECEIVED BY PROPER 
DEPARTMENT. THEN RETURN TO CONTROL DEPARTMEMT, 



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Form 48. Identification, Instruction, and Routing Card (green; face and 
reverse) . (Size 6 x 4.) 



232 



PROCUREMENT BY MANUFACTURE 



13. Inspection reports (Form 52), reporting all defective pro- 

duction of parts. 

14. Idle equipment (Form 53), reporting periods of idleness, 

with statement of cause, probable duration, and action to 
be taken to remedy. 

15. Control progress strips (Form 54), for registering on the 

control board accomplishment in the shop on production 
orders. 



f ORDER NO 


FOO PART OD OPOUD 


TIME WANTED 


DEL 
OEPT 


IVER 

won no PLACE 


OUAN.ONOROEO 


DATE 


MATERIAL REQUISITION (STOCK) 


II 1 II 1 1 
ORDER NUMSEQ 


1 1 1 

COEDIT »CCT. 


1 II 
DEBJT «CCT 


aJol.Lt 


II 

OPR. 


FlU. FROM 


OOV^TITY 


FILLEO 


irMOOL 


DESCRIPTION 


INEtOHT 


a 


<0 


PO(CE 


UM,T 


AMOUNT 1 




















CWKTE FIU.EO 




















nu.Ei> BV 






































RECEIVED BY 




















ITEMS BELOW ABE TO BE FILLED IN ONLY BY OFFICE. 


SIONEO BY 1 


COeCMT ACCT. 


DtOlT ACCI. 


RECAOOtO BV 


TOTAL AMOUNT 


ENTEBEO BV 


PRICED BV 


EXTENDED BV 

















Form 49. Material Requisition Card (pink). (Size 7^x3}^.) 



f ORDER NUMBER 




oeF>T 


^ 


OUANTirv ON ORDER 




MATERIAL CREDIT 


IJJJJJJ 


III 

CREOITACCT 


.eLLIt 


' 'Joi' ' 


J J 


SENT TO 


RETO^ED 


SYMBOL 


OE5CQIPT(OM 


«E.OHT 


0. 




PR.CE 


UN,T 


AMOUNT 1 


















RATE RECO 


















RECP. 




















































ITEMS BELOW ARC TO BE FiLLEO JN ONLY 6y OFFICE 


SIONEO BV 1 


CPEDlTACCT. 


DE6IT ACCT 


RECAPPED 6V 


TOTAL AMOUWT 


6NTEREP Oy 


PRICED BY 



















Form 50. Material Credit Card (white card, red ink). (Size 7^x3)^). 



GRAPHIC PRODUCTION CONTROL 



233 



16. Signal tags for control board (Form 55) and progress 
records, indicating conditions to be watched and giving 
reasons for idleness where hold-up is actually occurring. 
Also closely related to the regular mechanism of handling a 
production order are detailed shipping orders (Form 13, 
page y^)) ^"d purchased material received reports (Form 
82, pages 386, 387). 



ORDER NO. 



PAPT on GPOUP 



TO QUANT. ON ORDER 



WORKER ORDER NUMBER 



I m n m n rr 

DEC>r. |WKG PLACE. OPERATION DFCTV. GOOD LAB.HRS. LABOR BURDEN £ OPR 



5TO.HRLV PROD. 



I I I I I I M I j I I I I I I I N 



DEPARTMENT 



moRKINO PLACE 



ht/Mftcn OPCRATTOHS 



DESCRIPTIVE 



TtME CAPD(OIPECT) 



TOTAL GOOD 



LAST BALANCE 



BAL. TO DO 



NEXT 3.H. CHADOE 



TIME ANALYSIS 



STOPPING TIMES 



STARTING TIMES 



ELAPSED TIMES 



MACHINE l-IOURS 



THIS 0^4. NO. 



THIS OPERATION NAME 



LABOR AMT B.RATE BURDEN 



CARD BV CHECKED 



Form 51. Direct Labor Time Card (white). (Size 75^x3^.) 

Blue-print copies of all the above standard production 
analysis records should be furnished to every foreman and shop 
executive who is interested in them. Each tool crib should have 
a complete set. 



/.. 




ii«/0OKEQS 


THIS DATE 


. 


OUANTITV TO FOntVADD 


THIS MATERIAL IS SCRAP AND CANNOT BE UTILIZED FOR ITS ORIGINAL PURPOSE. A CARD IS 
ATTACHED SO AS TO PREVENT THIS MATERIAL BECOMINO MIXED tVITH GOOD WORK. 








STD. PROD. RATE 

1 . 




DISPOSAL DIRECTIONS 


5EN0 TO 
CONTPCM. 




MD5, DEDUCTION 

1 . 


OUA^.T(TY 


ReA50M5 SCRAPPED 






INSPECTOR'S SUGGESTIONS FOB REMEDY 


















PROCESS &. FINAL INSPECTION REPORT 







Form 52. Process and Final Inspection Report (pink slip, duplicate on card 
stock). (Size7Hx3J€-) 



234 



PROCUREMENT BY MANUFACTURE 



/OEPT. NO. 


MACHtNC NO. 


IDLE EQUIPMENT REPORT 


OATC 


1 


NO POWER 

5 


MISCELLANEOUS 
3 


HEOULAH 


1 1 
DEOT 


1 1 1 


3 


1 1 

Mouns 


1 1 1 


t 


1 


CARD BV 


TIME ANALYSIS | 


SiNO PUR. 

z 


STOP 




NO MATEDIAI. 

2 


AWAITIN0.3ET-UP 

6 


HOU»S lOLe 


5TANO BY eOUtPT 

3 


START 




CNTERED 


ELAPiED 




NO OOOEHS 
3 


AWAITING TOOLS 

7 


REMARKS 




on UMOCDRCMia 


AWAITING IN2T1HXTION5 







Form 53. Idle Equipment Report (red card). (Size 7%x3}4-) 



Description of Control Boards 

Prior to tracing the movements of a production order, it 
would be well to give a description of control boards and dis- 
patch boards and how they function. 

Control boards are 7 ft, 9^ in. long, 8 ft. 2^ in. high, with 
a base 10 in. high, 33 in. wide, supporting the upright part. 
Extending across the center are 50 time-scale strip pockets, 
made of sheet steel, i}i in. deep and 60 in. long. These strip 
pockets overlap, being spaced i^^ in. apart, making a total 
height of pockets 6 ft. 3 in. Above and below these strip 
pockets are steel clips i ^ in. wide and extending the width of 
the distribution pockets. These are holders for the date and 
day cards. 

On each side of and parallel to the strip pockets are 50 steel 
clips i>4 in. wide and 5^ in. long, for holding description and 
number cards of the production units to be controlled : i.e., two 
cards to each unit. 

On the left-hand edge of the board are 100 filing pockets, 
i.e., two pockets opposite each strip pocket. The upper is for 
holding the standard practice card of the machine (Form 43). 
The lower is for holding time cards (Form 51 ) after the opera- 



GRAPHIC PRODUCTION CONTROL 



235 



tion is performed and prior to extension 
and computation. On the right-hand 
side of the board are 50 distribution 
pockets, i.e., one to each strip pocket for 
holding time cards not yet scheduled. 

There are metal frames sliding on the 
upper and lower date scales, holding two 
colored plumb lines for framing the cur- 
rent date. These lines are an appropriate 
number of hours apart, i.e., one working 
day, the significance being that cards 
within the cords are regular and safe. 
Those cards behind the cords are behind 
schedule and dangerous, and call this fact 
to the attention of the control super- 
visor so that remedial measures may be 
taken. 

Both sides of the board are utilized, 
one being the duplicate of the other. Thus 
100 machines may be controlled by means 
of one board. 

This, in brief, is the mechanical con- 
struction of the control board. 

Control Board Operation 

Control boards are really maps of the 
production units of the shop. Each pro- 
duction unit stands by itself, and relations 
between operations on all production units 
are established on a time basis because 
the graphical scale of time is the same 
for all production units. 

The information available on the 
control board is as follows : 



Ah 



236 



PROCUREMENT BY MANUFACTURE 



5- 



Hours of work scheduled ahead for each production unit. 
Hours of work ahead for which material is available. 
Times at which deliveries of material must be made from 

preceding operations or production units. 
Times at which deliveries of material must be made to 

next operation or production unit. 
Production unit or place at which previous operations are 

done, or source of routing. 

6. Production unit or place at which next operation is to be 

done, or next place of routing. 

7. The shop order number, unit, quantities upon order, schedule, 

descriptive name, and number of parts, operation or opera- 
tions done at one setting, and the standard production per 
unit of time on any order. 

8. The ability of the shop to keep up with production rates and 

schedules. 

9. Causes of hold-ups and idleness and remedies for the trouble. 

Handling and scheduling a large number of unclassified 
tickets with facility presupposes that means of definite distri- 
bution are available. This is ad- 
mirably taken care of on the control 
board by means of the distribution 
pockets. 

Graphical scales for scheduling 
work against production units are 
arranged to post 300 hours of work 
against each machine, bench, floor, 
or other working place. The date 
scale is arranged above the strip 
pockets so that each day takes up a 
space equal to the number of shop 
working hours for a day. As time 
progresses, the vertical plumb lines separated by space equal 
to one day are moved across the face of the board. Com- 
parison of the graphical progress of the work at each production 
unit with the position of these cords indicates whether the work 
is ahead or behind schedule. 



IDLE 

NO 
POWER 




WATCH- 
OUT 

MORE 
ORDERS 


(red card) 


(green card) 



Form 55. Signal Tags for Con- 
trol Board. (Size % x 23^.) 



GRAPHIC PRODUCTION CONTROL !237 

The means of conveying instruction to go ahead on the 
work scheduled on control boards to the place where operations 
are actually carried on is furnished by workers' time cards 
(Form 51). 

As work is performed, accomplishments and elapsed time 
consumed in work are registered on this ticket. It then returns 
to the control board, and is used as a basis of registering 
progress, recording the success of the shop in meeting standard 
production rates. 

Description of Dispatch Boards 

Dispatch boards are of two general types : ( i ) unit dispatch 
boards covering but one production unit, and (2) group dis- 
patch boards, as illustrated in Form 42 (page 226), covering 
a number of production units, which are closely related. 

Usually production units are formed of a worker and a 
machine. Sometimes, as in maintenance work, when a machine 
is not used, the production unit becomes the worker only. At 
other times, a production unit is composed of a crew or gang 
of workers and one machine as in a rolling mill. In a machine 
shop, where the number of machines is greater than workers, a 
production unit is a machine to which a worker will be assigned. 

Usually unit dispatch boards are placed upon or close to the 
production unit served. They are used where there are only a 
few machines in a department, or where the machines are 
scattered in location. Group dispatch boards are constructed 
like a number of unit boards mounted upon a single base, and 
are used where the machines are located close together for con- 
venient service by the dispatcher, foreman, and inspector, as 
well as the workers. The dispatch board illustrated is fitted for 
40 production units, 20 on each side. 

For each production unit there is an identification marker 
and two clips arranged vertically. The identification marker 
gives the symbol of the production unit and a short description. 



238 PROCUREMENT BY MANUFACTURE 

The two clips are for holding the time cards brought by the 
dispatcher to the dispatch board from the control board. 

Dispatch Board Operation 

In the upper clips are filed the time cards for the jobs to be 
done, arranged in the order of their schedule : i.e., the first "job 
to do" is placed first, etc. The lower clip is for filing the time 
card of the "job doing," this card being transferred from the 
upper clip to the lower when the worker starts the job. 

Upon the table of the group dispatch board are two trays, 
one of which has two pockets and the other several. The first 
pocket of one tray is for placing the time cards for completed 
jobs which have not yet been process-inspected. When the time 
cards are process-inspected, they are ready for posting to con- 
trol board and are placed in the second pocket. The second tray 
is for holding surplus stocks of time cards and similar forms. 

At all times the dispatch boards show : 

1. The jobs ahead for each production unit during the next 

working day, ready to be worked upon and the sequence 
in which they are to be performed. 

2. The production units working and the workers who are at- 

tending them. 

3. The production units idle, as each unit without a "job work- 

ing on" time card in its lower clip must have an idle 
machine report thereon. 

4. The jobs being worked upon, the quantity to be completed 

on the operations, and when they should be completed. 

5. The routing, showing the previous, present, and next opera- 

tion of the jobs being worked upon. 

6. The standard hourly production rate of the "operation doing" 

and the succeeding operation. 

The above procedure is called "dispatching" and will -be 
described in more detail in the next chapter. 



CHAPTER XIX 

OPERATION OF PRODUCTION CONTROL 
MECHANISM 

Origin of the Production Order 

The routine of handling orders is illustrated in detail by 
a graphical chart (Form 56) . The manufacturing orders origi- 
nating from the stores records comprise the bulk of the orders 
to be controlled. As the procedure for their origin is the start 
of the production order handling procedure, it is necessary to 
trace them. 

Customers' orders of purchase are authority for considera- 
tion of the starting of manufacturing orders. But any plant 
manufacturing "for stock" and not "to sales order" must allow 
sufficient time for such manufacture; hence, customers' orders 
are considered en masse to determine sales requirements over 
a coming period. On the first of each month the selling depart- 
ment compiles a schedule for the production department, show- 
ing definite expected requirements of each kind of finished 
product during the coming month. The production department 
uses this schedule as a basis of its production schedule. Any 
very unusual requirement, such as a special bedplate for a 
lathe, would be taken from the purchase orders themselves as the 
occasions arise. 

A tentative schedule is also made up six months in advance 
for general guidance in determining production policies and 
programs during that period. 

Upon receipt, the quantities from the monthly schedule 
are posted to the requirements column of the finished product 

239 



240 PROCUREMENT BY MANUFACTURE 

stores record. The requirement, with a consideration for the 
quantity to be shipped before the first of the coming month and 
the quantity of the margin of safety, is compared with the 
quantity on order and the amount on hand to determine the 
amount available, as described in Chapter XI on "Control of 
Inventory." 

If the requirement is greater than the amount available, a 
progress and follow-up record card (Form 47, page 230) is 
made up for the minimum economic quantity to be produced, or 
for a greater quantity if needed or more expedient to be 
ordered at this particular time. 

Standard Practice Records 

These record cards are matched with the several produc- 
tion analysis records (Forms 44-46, page 228) to obtain 
the data necessary to plan the order. These reference records 
are made up once to cover every part and product made, becom- 
ing then master records subject to correction and revision as 
conditions of manufacture change. Production analysis records 
must be kept accurate and up to date. This includes every copy 
in both office and shop. 

When matching the record card with these master files, if 
no records are found for that product, the production control 
manager, working with the engineering department, must make 
up temporary but complete records as a means of planning 
this production. From judgment based upon accomplishment 
on the order, permanent records will be made up and issued in 
the regular way. 

The temporary records will be based upon the following: 

1. Work of similar nature which has been done before. 

2. The control manager's knowledge of the practical produc- 

tion rates possible. 

3. Conferences with the foremen, and in some cases conferences 

with the workmen, as to what can be done. 



PRODUCTION CONTROL MECHANISM 241 

Standard Parts List Record 

If the product is an assembly, the standard parts Hsts record 
(Form 44, page 228) is the first record used. It shows a tabu- 
lation in order of assembly of all parts and materials used in 
any product, together with the following pertinent information 
about each part : 

1. Name of the part. 

2. Legend of source and the assembly sequence. 

3. Other applications of the part. 

4. Quantity used in each product. 

5. Material used in the part. 

Standard Production Analysis Records 

The progress and follow-up record card (Form 47, page 
230) is then matched with the two standard production analysis 
records. Standard production analysis form (45, page 228) 
shows the complete manufacturing data for one part or one 
assembly. The following data is necessary for each order : 

1. Name of part. 

2. Small tool requirements per 1,000 pieces. 

3. Operation name and number in proper sequence. 

4. Routings of production units on which each operation can 

be done best. 

5. Standard ratings of time required to set-up the operation, 

and the standard hourly production rate known as the 
"SHP" for the operation. 

Standard production analysis form (46, page 228) shows: 

1. Standard manufacturing lot or batch quantity, which is 

the quantity to be kept together as a routing unit. Each 
lot has an individual identification and routing card (Form 
48, page 231). 

2. Average number of days required to complete lots or batches 

from raw material. 

3. A graphic chart of the "best flow" for successive opera- 

tions, showing the minimum possible time to make 1,000 
pieces. This possible time is that which accomplishment 
16 



242 PROCUREMENT BY MANUFACTURE 

is to be measured by instead of allowing parts in process 
to drift. 
4. The raw material or parts requirements for making 1,000 
pieces. The quantity required for an order will be some 
multiple of this quantity. 

Thus full data on manufacturing details and requirements 
of subassemblies, parts, and raw materials are determined. 
These requirements are posted to the stores record, paired up 
with the available, and a progress and follow-up record card is 
written up if more are required. The process of determining 
the order quantities is continued until all materials and parts 
are ordered. Raw materials and any parts secured by purchase 
should be covered by a purchase order requisition instead of a 
progress card. 

The individual progress and follow-up record (Form 47, 
page 230) is written up in detail to show the following infor- 
mation : 

1. Order date and order number. 

2. Material symbol and name. 

3. The quantity on order. 

4. The scheduled date to begin and to complete the order. 

5. If special manufacture for a shipping order, the name of 

the customer and the shipping order number. 

6. The operations in sequence, but never more than five as this 

number is sufficient to key all work. 

7. The working place of each "key" operation, the name of 

the operation, and the standard hourly production rate. 

Progress and follow-up records are filed by order number 
in one of three files : production orders not yet started, in 
process, or finished, depending on the condition of the order. 
Over the proper date at the top of the card a signal tab is 
placed for indicating when the order should be reviewed for any 
condition requiring attention and judgment in exercising 
control. 

Each production control form has a specific service to per- 



PRODUCTION CONTROL MECHANISM 243 

form in operating and maintaining a control of production and 
of costs. These forms are the means of control of all shop 
activities. It must not be expected, however, that the printed 
matter itself controls. When we speak of "control," we mean 
that the control mechanism properly carried out according to 
definitely written instructions will furnish a guide-post and 
time-table for initiative on the part of all shop and office execu- 
tives, so that there will be no confusion and no overlapping of 
responsibilities and control. 

Cost Sheet 

When the progress and follow-up record is being written up, 
the cost sheet (Form 27, page 129) should be made out and 
forwarded to the cost department as notice or authorization to 
place the order in the work in process record file. 

Identification, Instruction, and Routing Cards 

Identification, instruction, and routing cards (Form 48, 
page 231) are next made out — one for each batch or lot 
quantity as shown by the production analysis record. The 
following information is placed on each card; 

1. Order number and order and lot quantity. 

2. Part number. 

3. Starting working place. 

4. Any special instructions regarding how operations are to 

be carried out or regarding the disposition of completed 
product. 

5. Source of raw material and final destination of finished 

parts. 

6. Routing and operations in proper sequence, with production 

unit numbers on which each operation is to be done. 

Workers' Time Cards 

Workers' time cards (Form 51, page 233) are made up, one 
card for each production unit, for each day, for each operation 



244 PROCUREMENT BY MANUFACTURE 

— SO that they will be sufficient for recording the schedule, as 
well as reporting the progress and time taken on all the opera- 
tions necessary to carry out the work. Cards are made up in 
sufficient quantity so that there will be detailed daily reports on 
all work done on each order. Each card has a time scale for ten 
hours corresponding to the date and day scales. 

Information used in making up time cards comes from 
progress and follow-up records and standard production 
analysis records. The information placed on each time card is 
as follows : 

1. Order number and order and lot or batch quantity. 

2. Part number. 

3. The working places where the operations are to be done 

on that operation, the preceding and the succeeding. 

4. Standard hourly production rates for that operation and the 

next. 

5. The description and number of the operation. 

6. The last balance to do, which is placed only on the first card 

for each operation and is equivalent in that case to the 
quantity on the order. 

Time cards are made up to the extent of the number of 
hours required to do the work, in time increments equivalent to 
the number of days it takes to do the work or order. The order 
quantity divided by the rate determines the number of working 
hours required. The number of hours of work divided by the 
daily working period in hours indicates the number of workers' 
time cards needed to carry out each specific operation. 

A vertical penciled line is drawn across the graphic time 
scale on the time card at the end of the time period covered by 
each card. 

Standard Operation Symbol Code 

A great deal of time as well as space can be saved by 
adopting standard mnemonic symbols for writing out opera- 
tion descriptions. This saving in time is effected not only in the 



PRODUCTION CONTROL MECHANISM 245 

actual writing out, but also in the case of interpretation when all 
persons having occasion to use records use the same language. 
Examples are: Broach, Brch; Center, Ctr. Various combina- 
tions can be made by use of (-) ; Burr-Bevel, Brr-Bvl. Also 
groups of successive but independent operations can be made 
up by use of (/) : Bore, Chamfer, Countersink, Br/Chfr/Cs. 
Additions and subtractions to list can be made for special cir- 
cumstances or for those required for specific departmental 
operation groups. 

Stores Requisitions 

Stores requisitions (Form 49, page 232) are made up to 
cover the exact quantity of raw material or parts needed to 
complete the order. One requisition is made out for a quantity 
convenient to be issued at one time — 500 pounds of rod stock 
for automatic screw jobs, two truck loads for assemblies, and 
so on. 

Stores requisitions are written up to show the following : 

1. Order number and order and batch quantity. 

2. Working place where material is to be used — this is the 

delivery point for the material. 

3. The time the material is wanted. 

4. The kind and unit of material wanted. 

5. The exact quantity to be delivered. 

6. The signature of the party ordering the material. 

Scheduling Jobs on Control Board 

The control board slides or pockets, located in the middle 
^ sectioi: and into which time cards are inserted, are always kept 
filled with the graphical progress strips (Form 54, page 235). 
These control strips are for graphical registry of progress from 
such reports of production as come in from the shop on current 
workers' finished time cards. 

Workers' time cards, backed by identification, instruction, 
and routing cards and material requisitions, are next posted and 



246 PROCUREMENT BY MANUFACTURE 

scheduled on the control board in the spaces taken up by the 
production units which are to carry out the work. 

At the top of the control board, by means of cardboard, 
daily date cards, each of which is made a length equivalent to 
the shop hours on that date, shows how the regular daily work- 
ing periods line up with jobs scheduled on the control board 
face. 

Time cards to be posted on control boards, of course, must 
be scheduled at those places and under those dates where there 
is available productive capacity. The cards are placed on the 
control board so that they overlap each other and the left-hand 
edge of each one lines up with the penciled line located on the 
graphical scale of the preceding card. In this way the total 
extent of the graphical scale on cards posted on the control 
board indicates the total number of hours of work ahead of 
specific working places. That is, the order is scheduled to finish 
on the date wanted. The preceding operation is then scheduled 
to have the material ready for the completing operation. In the 
case of orders for assembling, all parts must be ready on the 
date specified. 

The control board is of sufficient width to schedule 300 
hours of work ahead of each production unit, or working place. 
Should work ahead of any specific working place be in excess 
of available space on the board, surplus time cards with other 
records which back them up are filed in proper sequence in 
the distribution pockets on the right-hand side or are re- 
scheduled to other machines. 

Registering Material Available for Production 

Since no production can start until the material is available, 
the next step is to determine this fact. The quantity available, 
as reckoned in terms of hours of work, is registered on the 
time cards with a green crayon. The minimum amount of 
material to be available ahead of any machine should be 



PRODUCTION CONTROL MECHANISM 247 

Standardized at two or three days' supply. If none at all, or 
less than the standard amount is on hand, a green signal 
"Watch Out— More Material" (Form 55, page 236) is posted 
at that point as warning and notice of need for action. 

Forwarding Requisitions to Storage Division 

When jobs posted on control boards are about ready to start, 
that is, one, two, or three days ahead, and jobs scheduled before 
them have gone ahead as planned, the identification, instruction, 
and routing cards and the material requisitions are removed and 
forwarded to the storage division, so as to get things ready 
before the current time cards have been posted on dispatch 
boards out in the shops. 

The storage division secures the material from the stor- 
age place and delivers it to the layout place in the operating 
department. The identification, instruction, and routing cards 
are attached to the material while the stores requisition is for- 
warded to the control department for entry on the stores record. 

Dispatching Work to Shops 

Periodically, day by day, the jobs located on the control 
board as the next jobs to do and whose material is indicated as 
being available, are dispatched as the next jobs to do — that is, 
dispatch clerks remove from control board cards for a day's 
work and post them to dispatch boards located in operating 
departments. Thus the shop's performance is under control. 
The next job to do is filed in the upper clip on the dispatch board 
as the front card of those filed there. The practice of filing 
the "first job to be done" on top never leaves any question as to 
the sequence of working. 

As soon as the next day's cards are posted to the dispatch 
board, the operating department foreman should review the 
board for his information concerning the work ahead to be done 
the next day. When checking up material available on the floor, 



248 PROCUREMENT BY MANUFACTURE 

he secures the necessary tools, set-up charts, and instruction 
sheets from the tool crib. Knowledge as to what is required is 
obtained from the tool crib's file of production analysis records 
showing these detail data. These are placed with the material 
at the machine or layout places. 

In addition to these jobs, he should also review work ahead 
on the control board from time to time. The foremen are 
responsible as well as dispatch clerks for making certain that all 
materials and tools are ready for the jobs scheduled. He should 
assure himself of this fact at all times. 

Starting and Quitting Jobs and Registering Accomplishments 

When jobs are about to start, the foreman or set-up man 
goes to the layout place and secures the material and tools used 
for carrying out the work. Material and tools for the "next 
job ahead" should be ready at the working place for the worker, 
before he actually finishes the preceding job. In this way all 
delays are avoided. 

When an operator starts his next job, he time-stamps or 
writes his "quitting time" and the quantity completed on the 
time card for the job finished and files it in the "not yet process 
inspected tray" on the dispatch board. Process inspectors or 
foremen, as the case may be, periodically make the rounds of 
dispatch stations and working places and inspect and certify 
registration regarding accomplishments noted on time cards, 
placing the cards in the second tray, so that the dispatcher 
may secure it on his next round or trip. The operator also 
registers his starting time on the time card covering the job 
which he is starting. He places this time card, "job now 
working upon," in the lower of the two dispatch board clips. 

Inspection Reports 

Whenever parts are rejected as defective, a regular inspec- 
tion report (Form 52, page 233) is made out, giving the quan- 



PRODUCTION CONTROL MECHANISM 249 

titles good and defective. The defectives are analyzed as to 
possible salvaging and the reasons for defects. Inspection re- 
ports revert to the control department with the time cards, and 
are used for analysis of causes and for planning the salvaging 
work. The duplicate of the report is attached to the rejected 
material. 

Periodically, files of defective parts are used for compiling 
the summarized rejection report and for the issuance of orders 
for salvaging such quantities as are not defective beyond repair. 
The salvaging orders are to be planned, scheduled, and routed 
in the same way as regular production orders. 

Dispatchers delivering current time cards for work to do 
also have the function of collecting workers' finished time cards 
as soon as the finished work is inspected. Dispatchers, when 
making their periodic rounds of dispatch boards and working 
places, make these collections as well as check the registration 
of time, and available material and tools at machines. Dis- 
patchers can anticipate changes of conditions and then check the 
condition on their next round. Conditions requiring the at- 
tention of the control clerk are registered on the control board 
by "watch out" signals (Form 55, page 236). 

The dispatcher carries these reports to the control depart- 
ment and files them on left-hand sides of control board, opposite 
machines or working places which did the work. 

Computations Made by Dispatchers 

However, before the dispatcher files the time cards on the 
control board, he computes the following : 

1. Elapsed time. 

2. Total pieces produced, good and defective, and the balance 

good to do, which is noted on the next card for the job. 

3. Hours of credit at the standard production rates for the 

operation just completed, as well as the hours of debit as 
represented in raw material for next operation. 



250 PROCUREMENT BY MANUFACTURE 

Handling Irregular Conditions 

Dispatchers also collect stores requisitions, inspection re- 
ports, and idleness reports. Whenever a machine or a worker 
is idle, foremen are required to make out an idle equipment 
report (Form 53, page 234) to show: 

1. The unit or worker idle. 

2. Cause of idleness and probable duration. 

3. Starting time of idleness. 

4. Suggested remedy. 

This card is then filed on the dispatch board in place of the 
time card for the job just interrupted or completed. The time 
card is closed out as previously described. The dispatcher 
brings the report to the control board, registers the condition of 
idleness by means of the proper signal, and returns the report 
to the dispatch board from where he secured it. It remains 
there until the period of idleness is ended. 

This idle time signal on the control board face is tagged at 
the time that the idleness started, and is left in place until the 
quitting time registration on the idle time report is brought to 
the control board by the dispatcher and filed in the distribution 
pocket with the time cards. He then removes the signal. 

Any order whose regular schedule of performance is inter- 
rupted should be rescheduled as carefully and accurately as when 
first scheduled. It may be that the completion date may be set 
ahead or vice versa. 

Registering on Control Board Progress on Orders 

Order clerks periodically post accomplishments and duration 

of idle times, as registered on time cards and idle machine cards, 

to graphical progress scales on control board. 
From time cards: 

I. Hours of credit for good work completed at the standard 
rates of production are posted in black on progress regis- 
ter strips. 



PRODUCTION CONTROL MECHANISM 25 1 

2. Hours of debit for good work completed, which exist as 

available material for the next operation, are posted in 
green on graphical scales of time cards. Green-colored 
registrations, that is, available material, are always posted 
on time cards since before any work can be done the 
material with which to work must be ready. 

3. Defective material, that is, hours of work at standard rates 

of production spent on material which is defective, is 
indicated on the last time card of any order, by filling the 
graphical scale in the reverse direction with red crayon. 
This work must be repeated, providing it is possible to 
secure additional raw material for the operation. 

From idle machine and worker reports : 

I. Length of time the machine or worker was idle. This is 
registered in red crayon. 

Posting Accomplishments to Progress and Follow-Up Records 

After registrations of progress have been made on control 
board graphical scales, accomplishments in unit quantities, both 
good and defective, are registered on progress and follow-up 
records by progress clerk from the time cards. 

When posting, the progress clerk is always alert for marked 
discrepancies between the actual elapsed time and the standard 
hours of accomplishment. Such cards are called to the attention 
of the production manager for investigation and, if necessary, 
for the revision of the standard hourly production rate or the 
disciplining of the worker. 

Making Up the Pay-Rolls 

Time cards, after these registrations have been made, are 
kept until all the cards for the day have been posted. Dis- 
patchers on the morning of each day sort the time cards for the 
previous day by worker number and check them with clock 
cards. The total time for each worker must be accounted for 
each day, and must equal the elapsed time as shown by the clock 



252 PROCUREMENT BY MANUFACTURE 

cards. This operation is necessary for all workers paid from 
time cards. Each day's cards are then forwarded to the pay- 
roll and cost departments for the compilation of their reports. 

The time cards for the workers paid from these cards are 
rated and extended, and any bonus is added to determine the 
labor cost of the production, after which the earnings for each 
worker are entered on the pay-roll record. Piece-work cards 
may be rated in advance of the work, at the same time as the 
order data is written upon the cards prior to filing on control 
boards. 

The cost department now requires the cards for making 
up the routine shop efficiency reports and for costing orders. 

Departmental Efficiency Reports 

The departmental efficiency reports are first made up. Time 
cards arranged by operating departments are the basis of this 
report. The elapsed time in hours and the hours of credit of 
each department's cards are added separately. Dividing the 
hours of credit by the elapsed time in hours gives the percentage 
of efficiency or ability to meet the standard hourly production 
rates. The total time divided by the number of cards gives the 
average time per job — a measure of the success in obtaining 
long runs. This can be better measured by the average number 
of jobs per worker, allowing for the continuation of any job 
from the day before. 

Departmental Idle Time Reports 

The idle machine and worker cards are totaled by depart- 
ments and by causes of idleness for making up the departmental 
idle time reports to determine the causes and extent of idleness. 
This is a particularly important matter to determine for key 
departments when the required standard time for completing 
orders approaches the available machine time. 

Idle time is productive of nothing but financial loss and 



STANDARD PRACTICE RECORDS 

PARTS LrST5.rw«-- 



SOURCES OF STORES RECEIPTS & DISBURSEMENTS 

OTHfR 1>tAN FROM- 
CLWRCNT PPOOUCTION OROCRj 




^ 


r 








/ 



FORM 56 



PRODUCTION CONTROL MECHANISM 253 

should be carefully watched. Its cause may be too much 
machine tool equipment or not enough ; but whatever the cause, 
investment means fixed charges and dividends must be earned 
on that investment. 

This completes the description of graphic production con- 
trol. Such control is simply definite paths and procedures 
previously planned out and to be followed at certain scheduled 
rates. Such foresight is in contradistinction to usual methods 
where efforts are spasmodic and scattered and results are 
obtained in haphazard fashion. 



PART IV 
PROCUREMENT BY PURCHASE 



CHAPTER XX 

THE FUNCTION OF THE PURCHASING 
DEPARTMENT 

Preliminary View of the Purchasing Department 

The purchasing department is a comparatively new factor 
in business organization. Its general adoption reflects changing 
conditions in purchasing and an increasing realization of the 
important part played by good buying in the success of any 
business enterprise. There are many large concerns, however, 
which still persist in the old method of departmental buying. 

As the practice of exact cost-keeping becomes more uni- 
versal and the dislocation due to the war becomes a memory, 
prices will become more and more stationary. The prices quoted 
by most responsible firms are no longer tentative prices pur- 
posely placed high to provide a margin to which a discount can 
be applied or that can be cut down by the purchaser without 
destroying the profit. Exact knowledge on both sides is in- 
creasingly taking the place of persuasive methods. The modern 
purchaser as well as the salesman knows his goods and fre- 
quently the purchaser is the better informed of the two. More 
is demanded of the buyer today than such mastery of the 
essential psychology as makes it possible for him to drive a 
satisfactory bargain. He must have the requisite technical in- 
formation required for the solution of his purchasing problems, 
and the accumulation and maintenance of this store of knowl- 
edge is possible only in a functionalized department of highly 
paid specialists, devoting all their time to the work of pur- 
chasing, 

17 257 



258 PROCUREMENT BY PURCHASE 

Defects of Departmental Buying 

Whatever are the apparent advantages of the older method 
of entrusting this important function to the individual depart- 
ment head, they are vastly overbalanced by its disadvantages. 
The department head knows what he wants, but here his 
qualifications for the task of purchasing usually end. Almost 
anyone can place an order and secure a delivery if the market 
conditions are normal. It is in determining the proper price 
and selling terms, and in securing delivery when the market is 
the least bit tight, that the untrained buyer is at a distinct dis- 
advantage. The individual department head is seldom equipped 
with the necessary knowledge of market conditions. Records 
of previous quotations and purchases alone do not enable him 
to determine whether the price quoted is reasonable today or 
whether it will not be excessive tomorrow. He does not ap- 
preciate the accumulative value of advantageous discounts or 
the importance of those elements that insure prompt delivery. 
He does not realize the value to the business as a whole of ad- 
vantageous relations with vendors. He fails to see the relation 
of his purchases to the activities of the entire organization. He 
has necessarily a narrow view, limited to the interests of his own 
department. 

Most serious of all, the department head generally fails to 
realize that buying, like selling, is an art as well as a science. 
When a mere order giver is brought in contact with a salesman 
who is something more than an order taker, the former suffers 
from a handicap of which he may never be conscious but which 
will inevitably be reflected in the expenditures of his department. 
The salesman is a specialist. He knows the conditions of his 
market, he knows his products and his competitor's products, 
their strong and weak points. He holds his position by virtue 
of his ability to make the purchaser want what he has to sell. 
The more important the purchase to be made, the more capable 
is the salesman sent to effect a sale and the less the chance the 



THE PURCHASING DEPARTMENT 259 

occasional buyer has of holding his own in concluding a reason- 
able bargain. 

The mere element of time taken from the productive and 
executive work with which the department heads are especially 
concerned bulks large in the aggregate. When promiscuous 
purchasing prevails, much of the time spent in the details of 
purchase transactions is profitable only to the salesman. For 
the active head of an important department, it represents a 
misappropriation of time which alone goes far to justify the 
creation of a distinct purchasing department. 

Specialized Purchasing 

It is coming to be generally realized that the specialization of 
the purchasing function is a vital necessity to every enterprise. 
To install a purchasing department, a group of professional 
buyers is organized, who understand and appreciate both the 
problems and difficulties of the purchasing function and the 
needs of the departments which they serve. To this department 
will come both the specific requests of the control department 
for material and supplies which must be purchased outside, and 
the technical questions regarding what the market offers in a 
variety of materials. For the content of the purchase requisi- 
tions or requests for information, the purchasing department is 
not primarily responsible. It is its function to get: (i) what 
is wanted, (2) when it is wanted, and (3) at the lowest pos- 
sible price — consistent with the quality demanded for the par- 
ticular purpose for which the material is sought. 

The Purchasing Agent 

The selection of a purchasing agent, the man who is to direct 
the department, is of the highest importance. It is no longer 
sufficient to pick any bright man and "give him a chance." A 
man who has been specially trained must be selected. 

Today the purchasing agent has become a constructive force 



C60 PROCUREMENT BY PURCHASE 

in his organization. He is a student of the market, with a 
definite and timely knowledge of its trend in every leading com- 
modity. He is a keen judge of commercial conditions. He 
knows the details of transportation and the constant changes 
in rates that play such an important part in ultimate costs. He 
knows the standing and character of the firms from which he 
buys; which are reliable and which must be closely watched. He 
knows all there is to know of the financial and production 
conditions of his own firm, and he correlates his purchases if 
they are extensive with the credit fluctuations of the seasons. 
Such a man commands an excellent salary, but if he be truly 
competent he will save it many times over in the course of the 
year. 

Increased Profits through Savings 

The properly organized and properly operated purchasing 
department is not an added expense. It is, on the contrary, 
one more of the fruits of scientific management directed to the 
reduction of costs. This country during the last decade has 
passed through a period of unexampled expansion. Intensive 
efforts along the lines of salesmanship have brought commercial 
expansion in many lines to the limits of the available market. 
Sales and profits have been limited only by production capacity. 
Today, however, many concerns are approaching a point where 
the future increase of profits must come from economical ad- 
ministration and from savings in every department rather than 
from increased sales. Shorter hours, increased cost of 
materials, an ever-mounting cost of doing business, to say 
nothing of the inevitable salary increases in every department — 
all emphasize the necessity of reducing costs. The task of re- 
trenchment may begin in the work of the purchasing depart- 
ment, rightly organized and correctly operated. There was a 
time when the cost of labor was the largest factor in the pro- 
duction cost of most products. The cost of the raw material 



THE PURCHASING DEPARTMENT 261 

was relatively small and all effort was concentrated in reducing 
the labor cost. This led to the adoption of automatic 
machinery and of other labor-saving devices. But today direct 
materials form a larger proportion of the production cost than 
before and must be closely reckoned with, while "burden," the 
third element of costs, is largely made up of expense materials, 
as illustrated in Form 3 (page 29). To reduce material costs 
is just as important a matter as to reduce the labor costs — and 
it is here that the purchasing department becomes one of the 
chief factors concerned in the increase of profits through 
savings. The success or failure of a commercial organization 
is often the direct result of good or bad purchasing. 

Good Buying 

Good buying does not mean necessarily purchasing at the 
lowest market price. The purchasing agent who sets out to 
make a record for himself, to "show results" regardless of any 
other consideration, reveals himself as a man of narrow vision, 
deficient in qualities that make for success in this work. 
Good buying means rather that the purchase has been made 
with accurate foresight, at the lowest possible price consistent 
with the requirements of the requisition. It implies an intel- 
ligent understanding and an exact knowledge of the materials, 
manufacturing processes, market prices, sources of supply, 
trade customs and usages involved, and the interrelations of 
purchasing with the other activities of the organization. Poor 
buying, on the other hand, is promiscuous and haphazard. It 
may be intuitive, based on rumor and guess, a gamble in which 
the buyer sometimes wins, but sooner or later inevitably must 
lose. Or it may be exceedingly conservative, following a 
settled course and making little use of readily available infor- 
mation. In either case the buying is unscientific and likely to 
result in loss. 

Before we can approach a standard of purchasing that can 



262 PROCUREMENT BY PURCHASE 

be called good buying, a general knowledge of values must be 
supplemented by the more specific knowledge of conditions. 
This knowledge the efficient purchasing department will have 
collected and so tabulated as to have constantly available. When 
any transaction is compiled it should be possible to check up 
and to justify any detail with accuracy and precision. 

Records 

It is by virtue of its record that the efficiency of a purchasing 
department may be largely judged. To a large extent they will 
be the detailed tabulation of its experience. They will include 
the complete listing of past orders, showing at a glance the 
sources of supply, the prices, the selling terms, and everything 
else that will make possible the duplication of the order and indi- 
cate whether or not an exact re-order is advisable. 

Besides this specific information, the purchasing department 
should be the repository for the general information that will 
determine such vital questions as when large orders for material 
can be placed to the best advantage. The answers to such ques- 
tions depend upon the condition and trend of the market. One 
cannot afford to guess or gamble but must call into considera- 
tion every bit of available data on every factor that has a bear- 
ing on market conditions. To this end the purchasing depart- 
ment may concern itself with the collection and compilation of 
detailed statistics of at least a few basal commodities. This 
work under proper supervision soon becomes a matter of 
routine but its value is cumulative. 

As a part of its record-keeping function, the purchasing de- 
partment will also be called upon to collect, classify, and index 
catalogues and informative advertising matter with which it 
comes in contact. The value of technical catalogues cannot be 
overestimated. They are not only a source of specific facts, but 
they are veritable mines of useful general information which 
should not be overlooked. While they are primarily adver- 



THE PURCHASING DEPARTMENT 263 

tising mediums, the spirit and policy of modern advertising 
makes them usually reliable; their statements can generally be 
taken without discount. Perhaps most important are the price 
lists of every concern with which the department does business 
or by whom it is solicited. Books and periodicals pertaining 
to materials should also find their ultimate place in the pur- 
chasing department, unless the organization maintains a special 
business library. 

Contact with the Outside 

In its contact with the commercial world the purchasing de- 
partment, to an extent equaled only by the sales department, has 
in its keeping the good name of the firm. On its treatment of the 
many concerns with which it deals, the reputation of the firm for 
fair dealing, courtesy, precision, promptness, and reliability 
largely depends. In its handling of disputes which are bound 
to arise, the need of a consistent and sound policy and method 
of procedure will be evident. 

The business relations of the purchasing department with 
outsiders are usually covered by agreements in which the vendor 
is bound by a legal tie. The legal rights of a purchaser are 
usually adequately secured by the written terms of the contract, 
but the numerous little details of service, slight in themselves 
but large in the aggregate, are obtainable only to the extent that 
the vendor wants to render them or thinks it expedient so to do. 
It rests with the purchasing agent to establish and maintain 
with his vendors a relationship that will make them want to do 
business with him and eager to meet his every wish. 

Personal Relations with Vendors 

The purchasing agent who elects to keep salesmen at arm's 
length and to disregard the value of personal relations may 
sacrifice more than he gains. The human element in business 
cannot be disregarded. The man who knows how to capitalize 



264 PROCUREMENT BY PURCHASE 

it will always have a great advantage over the man who ignores 
it. Business is business, but friendship is not without a legiti- 
mate place in business relations. Every man can best judge his 
own contact along these lines. He must not allow friendship to 
influence his business judgment and he must know to what 
length he can safely allow personal relations with selling agents 
to go, without affecting his decision. It would seem that a 
broad-minded purchasing agent could safely give friendship as 
readily as it is offered and have no difficulty in determining its 
limits. Kindness, courtesy, fair dealing, frankness, even when 
they are used to inform the salesman that he has lost the order, 
all inspire friendship without sacrifice of anything on the part 
of the buyer. Their small expenditure not infrequently brings 
large returns. Thousands of dollars have been saved to buyers 
by the advance information given them by friendly selling 
agents relative to market conditions and future price changes. 

The wise purchasing agent will seek the good-will of selling 
representatives as much as his own good-will is sought. He 
will speak well of them so far as possible in his correspondence 
with their employers and he will make it his business to see that 
they receive credit for all sales effected through their efforts. 
He will show them and their employers that his business can be 
secured in fair competition on the basis of price, quality, and 
service and that they will receive payment without undue delay. 
In short, he will appreciate the practical advantage of causing 
himself to be considered as a valuable customer. The desire 
of the salesman to meet the wishes of a house whose good-will 
and whose trade he values and of a purchasing agent whom he 
likes and therefore wishes to help is an advantage in buying, 
which should be fostered. 

On the other hand, no buyer can afford to rest under the 
suspicion that he can be influenced by the direct or indirect ac- 
ceptance of gratuities. Such a suspicion will offset all the ad- 
vantages that he may have built up along the lines suggested. 



THE PURCHASING DEPARTMENT 265 

Then neither he nor his house can be regarded as desirable 
customers. The good-will which is of such value and advantage 
will give place to mutual suspicion and distrust from which all 
parties concerned will suffer. 

Justifying Its Existence 

If the purchasing department is to justify itself, it must do 
all the good that the individual buyers have done in the past and 
at the same time overcome the evils of the old method. It must 
clearly demonstrate its superiority by performing more 
efficiently its essential functions. 

There are at least seven factors which every purchasing 
agent must have constantly in mind in determining his pur- 
chase if he is to make the selection that will at once satisfy his 
consuming department, the treasurer, and the best interests 
of the business : 

1. He must be sure that the article selected is perfectly adapted 

to the use to which it is to be put. 

2. He must satisfy himself that its quality meets the specifica- 

tions of the requisition. 

3. He must be sure the quality is uniform throughout the ship- 

ment. 

4. He must purchase it at the best price consistent with the 

requirements and on the most advantageous terms. 

5. He must be confident that he can effect the delivery on the 

date on which the purchase will be required. 

6. He must determine the proper quantity to meet the current 

needs, with due regard to the seasonal demand and supply, 

7. He must obtain a guarantee of stated prices for a fixed 

period and, if possible, protection against a decline of 
prices during the period carried by the agreement. 

The Seven Stages of Purchasing 

When the purchasing department functions, its work de- 
velops through seven distinct stages which occur in the follow- 
ing order : 



266 PROCUREMENT BY PURCHASE 

1. Determination of the articles. 

2. Learning what the market offers. 

3. Selecting the vendor. 

4. Determining the price. 

5. Making the contract. 

6. Effecting the delivery. 

7. Completing the contract. 

I. Determining the Article 

In this stage the attitude of the purchasing department 
is somewhat passive. While it may suggest changes, the order 
requisition which gives rise to the purchase order comes as the 
expression of a specific request of another department head or 
by reason of the depletion of stock. This requisition may call 
for a supply of any standard material to be obtained by pur- 
chase. It is the work of the purchasing department to secure it. 
The purchasing agent may properly question both the quality 
and quantity requisitioned, but he cannot make any change 
without the approval of the requisitioner. When the purchasing 
agent has asked and received the confirmation of the depart- 
ment head or of a higher authority regarding any questionable 
details of the requisition, it devolves upon him to secure what 
is wanted; responsibility for the details of the requisition is 
no longer his. 

In appealing from the detail of the requisition the pur- 
chasing agent must be sure that he will not subject the requisi- 
tioner to delay or inconvenience. Time is often a most 
important element in the case of purchases. The failure of 
materials to arrive promptly may destroy the entire working 
schedule of the factory. The routine should proceed, if neces- 
sary, to the point of placing an order with the privilege of 
cancellation later. It must be assumed that the materials called 
for under the conditions specified in the requisition are de- 
manded in good faith, that the material ordered is just what is 
needed, and that the delivery time named is the exact time at 



THE PURCHASING DEPARTMENT 267 

which this material must be available if the schedule of opera- 
tions is to be followed. 

2. Knowing the Market 

The purchasing department must at all times know what 
the market offers. This is a point, in connection with the 
problem of determining the proper article, in which the pur- 
chasing department can function very actively. 

It is the business of the purchasing department to inform 
itself regarding all new materials as rapidly as they appear in 
the market. In this, salesmen become of real educational help. 
The trade papers usually offer the first information of the ap- 
pearance of a new product. Such information should be col- 
lected by the purchasing department and at once referred, not 
to the user of the older standard, but to the authority who may 
direct the substitution of the new one. It is one of the faults 
of the older system of departmental purchases that the depart- 
ment head frequently is more willing to defend his present 
standards than to experiment with new ones. The delay, in- 
convenience, and expense involved in such changes, the im- 
mediate disadvantage to gain a problematical future advantage, 
the influence of natural conservatism, and the tendency to let 
well enough alone — all operate to discourage such experiments 
and ultimately to retard progress. 

It is the function of the purchasing department, which is 
affected by none of these considerations, to call attention to the 
new article, to arrange for its demonstration, to know the result 
of the trial and the reasons for its rejection if is not accepted, 
and to give the producer an opportunity of adapting it to the 
needs of the organization if such a course be practicable. 

3. Selecting the Vendor 

In addition to knowing what the market offers, the pur- 
chasing agent must know the vendors. Among them he must 



^J«l^ 



268 PROCUREMENT BY PURCHASE 

be able to make such a choice for trading purposes as to avoid 
the losses in time, money, and efficiency that come from the 
selection of the unreliable vendor. The vendor who will not or 
cannot meet his contractual obligations should be known. The 
results of his failures are borne ultimately by his customers. 

The records of the purchasing department will contain the 
names of several reliable sources of every kind of material 
which may be demanded. Of every one of these sources the 
department will have complete information along several lines 
of inquiry. There will be a complete record of past transactions 
showing the nature and quality of the services rendered by each 
vendor. There will be a record of his financial standing, the 
capacity of his plant, his relations with his employees, his 
shipping points, and his transportation facilities. Every new 
vendor whose offers are seriously considered will be similarly 
investigated and recorded. 

These records will determine the selection of vendors who 
will be asked to submit bids. When the various bids are tabu- 
lated they may be again consulted. This study will enable the 
purchasing agent to go beyond the mere quotation. By a 
careful weighing of the quality of each product, by considering 
the quality of the service that each vendor has rendered in the 
past and may be expected to furnish in the future, and by 
taking into account the resources, the reliability, and the general 
character of each, the purchasing agent is in a position to make 
his selection with intelligence. 

4. Determining the Price 

The chief function of the purchasing agent is not to beat 
down prices but to render service. His obligation to obtain his 
materials at the lowest possible cost cannot be disregarded, but 
the outcome of his effort in this directoin does not necessarily 
reflect the success or failure of his department as readily as do 
two other factors : selecting the right articles, and securing 



THE PURCHASING DEPARTMENT 269 

prompt delivery. Purchase price is nevertheless of great im- 
portance. Every cent added to the cost price is a cent deducted 
from the net profits and is likely, sooner or later, to be reflected 
either in the quality of the product put out, or in its selling 
price. 

In determining what is the best price, the purchasing agent 
will have considered the selling terms, cash discounts, f.o.b. 
point, and other similar factors. The purchase cost of a single 
article, unless very large, is frequently lost sight of in the total 
cost of a project. Questions of general policy and the inter- 
relation of many factors all have their bearing in determining 
the selection of a commodity and tend to minimize the impor- 
tance of always giving the order to the lowest bidder. 

The purchasing agent should be recognized always as the 
sole authority in the matter of price. The tendency of salesmen 
to quote prices to department heads should be ruthlessly sup- 
pressed. While the purchasing agent is no longer selected solely 
because of his ability to "dicker," he may still find a fertile 
field for this kind of action in dealing with competitive prices. 
He will seldom place an order without comparing recent prices 
or obtaining bids from two or more reputable concerns, each of 
which is able to fill such orders as may be obtained. While 
such quotations should be standardized as far as possible by 
the specifications of the contract desired, they should neverthe- 
less be subject to the closest scrutiny, especially if they vary 
widely, in order to ascertain that the bidders are figuring on a 
similar basis of costs. A particularly low bid should always 
call for considerable scrutiny, not only to determine the basis 
on which it was made^ but to ascertain the standing of the firm 
and its ability to fulfil a contract. 

There is an increasing tendency on the part of manufactur- 
ers to present a single price, and that the lowest which it can 
afford to accept. Since costs are more accurately figured than 
formerly, the vendor knows what he can do and how far he can 



270 PROCUREMENT BY PURCHASE 

go. He is less willing than formerly to do business at cost for 
the sake of prestige, or to risk a loss by bidding too low. 

The buyer, on the other hand, has his tabulated informa- 
tion as to sources of supply, his records and prices which he 
has carefully prepared and on which he will largely rely. The 
trader's instinct is being gradually subordinated to exact knowl- 
edge as the old-fashioned persuasive drummer, who talked in 
generalities, is giving place to the scientific salesman who knows 
his goods. Nevertheless there is a danger of becoming too 
mechanical and automatic. There are moments when intuition 
and insight are worth more than classified information and pre- 
conceived rules of procedure. The modern buyer cannot afford 
entirely to disregard his native shrewdness and common sense. 

5. Making the Contract 

The detailed discussion of the rules and methods to be fol- 
lowed in making the contract may be postponed until a later 
chapter. It is sufficient to state here that the mutual contrac- 
tual obligations should be stated in a manner that is clear, exact, 
and comprehensive. Every oral contract should be confirmed 
in writing and the purchase order form with its accompanying 
conditions and rules of procedure, when acted upon by the 
vendor, will constitute a contract that will be sufficiently bind- 
ing. Changes in the original order that has been confirmed 
by the formal acceptance of the vendor, should be provided for 
by a similar form to be similarly accepted. With these qualifi- 
cations the original written order and its acceptance may be 
considered as a contract irrevocable except by mutual consent. 

Where the time element is of particular importance, the 
buyer should provide for the privilege of cancellation of his 
order in case of failure to deliver promptly, and sometimes it 
may even be necessary to include a penalty clause providing 
for the forfeiture of a part of the purchase price if the delivery 
is not on time. On the other hand, the buyer always has the 



THE PURCHASING DEPARTMENT 271 

right to refuse to accept material at a premature date and such 
a refusal does not exempt the seller from making his delivery 
on the date agreed upon, 

6. Effecting Delivery 

Having placed its order, the purchasing department must 
see that the materials are on hand when desired and are de- 
livered as contracted for. To this end it must maintain a 
watch both on the producer and on the transportation agencies, 
by means of an efficient follow-up system. Here its ability 
to command service, through the standing of the organization 
as a desirable customer and the personal good-will which the 
department has assiduously cultivated in its dealings with the 
vendors and their representatives, becomes a factor of impor- 
tance. By means of it, sometimes, the seemingly impossible 
may be accomplished. 

On the other hand, the natural desire of the vendor to 
accommodate his customer may be dissipated by a tactless pur- 
chasing department. The petty annoyance occasioned by a con- 
tinual and too vigorous following up of the vendor before he 
has had a reasonable time to effect his delivery should be 
avoided. Both the buyer and the seller are seeking all the profit 
possible. Each should understand the other's difficulties and 
recognize that their mutual advantage lies in friendly 
co-operation. 

7. Completing the Contract 

In making his contract with the vendor, the purchaser has 
implied that he will give, in addition to the money considera- 
tion, a certain amount of service in return for the material and 
service rendered by the vendor. The vendor completes his 
part of the contract when he delivers the goods. The pur- 
chaser has yet to complete his part. Before the bill can be 
paid the goods must be checked, the invoice sent through a 



272 PROCUREMENT BY PURCHASE 

certain routine, and finally certified and sent on for payment. 
In the prompt and faithful performance of this service the 
purchasing department expedites payment, upholds the credit 
standing of the organization, and wins the good-will of the 
vendor. Its ability to do this depends largely on a definite plan 
of procedure. 

The Purchasing Department and the Organization 

The purchasing department, like the stores department, is 
a functionalized service organization which is in direct relation 
with every department of the organization. In Form 2 (page 
20) is shown its place in the organization. Its head, while 
responsible to the works manager as the director of production, 
is on a level in authority with each of the general functional 
managers. With these officials and with heads of depart- 
ments in both ofiice and factory, the purchasing agent must be 
in close co-operation, familiarizing himself with their needs 
and their problems. 

The efficient purchasing department must be eternally vigi- 
lant, it must avoid ruts and the rule-of-thumb, it must be 
conscious of every trade wind that blows and alive to every op- 
portunity that offers. It must function smoothly and promptly. 
To a greater extent than any other department it must "carry 
the message to Garcia." When it cannot find a way, it must 
make one. Its improvement over the old system of random 
buying, in its savings, in its range of interests, in its exact 
knowledge, and in its smooth operation, is so evident that its 
existence is abundantly justified. 



; CHAPTER XXI 



THE ARTICLE 



The Selection of the Right Article 

Before any business can begin its work, and as long as it 
continues in operation, it must be provided with materials and 
supplies. The selection of the right article then becomes the 
first subject of our consideration, not only in point of time but 
in its degree of importance. 

The determining factor in the selection of the article must 
always be its precise suitability for the purpose for which it 
is purchased. If its grade is either inferior or superior to the 
needs of the case, the finished product will suffer. In the one 
case the quality will be impaired; in the other the cost will 
be too great. At times the success of the production program 
is absolutely dependent on obtaining precisely what has been 
ordered, and any failure of the purchasing department to obtain 
it or any attempt to substitute may result in confusion, delay, 
and perhaps the complete demoralization of the production 
program. 

Quality versus Price 

Quality — the exact grade, size, or weight required — must 
always be placed before price in selecting the article. Price is 
important, but the unfortunate results of a deviation from the 
standard requirements may soon offset any saving in cost. 

The substitution of an article of slightly different size may 

result in the necessity of the manufacturing department having 

to reshape the purchased article before using it. Or again, in 

machining a part from, say, a 2-inch piece of steel, the cut 

i8 273 



274 PROCUREMENT BY PURCHASE 

may be just sufficient to allow simply for proper finishing. 
Although the saving in cost be considerable on a job lot 1/16 
inch larger in diameter, the time consumed in more machining 
to secure the desired size and finish may offset the saving in 
cost or result in an actual loss. The habitual refusal of pro- 
ducing department heads to sacrifice quality and suitability 
for price considerations in those organizations which allow the 
department heads to purchase what is used in their own depart- 
ments is one reason why decentralized purchasing so often 
appears to be the better method. 

While the quality can never be safely sacrificed, price can 
be sacrificed often with an ultimate advantage. When the right 
article has been selected the result is perhaps that a frequent 
cause of delay in production is removed, the chance of produc- 
ing an unsatisfactory and possibly unmarketable article is re- 
duced, and the cost of production is cut. Thus, what originally 
may have seemed extravagance in the price paid for materials 
becomes an economy. The selection of the article best suited 
for the purpose is the first consideration, and the price that 
is paid for it must always be of secondary importance. 

Essential Knowledge 

If a purchasing agent is to make an intelligent selection 
of the required commodity, he needs to know : ( i ) the use 
to which the article is to be put, and (2) what the market 
offers. 

The extent of his knowledge is the measure of his 
qualification for his particular task. As a rule the head of a 
centralized purchasing department is better qualified in the 
commercial aspects of his work than in its technical require- 
ments, but if he is awake to the demands and the opportunities 
of his position he will neglect no chance to educate himself 
and to eliminate his shortcomings. 

Contact with the department heads, visits to consuming or 



THE ARTICLE 275 

manufacturing departments and shops, the study of manu- 
facturing operations by following the processing of individual 
materials — all will better enable him to appreciate shop prob- 
lems and material requirements. His dealings with salesmen 
and his study of catalogues and technical books and journals 
will be prolific sources of market information which will sup- 
plement and confirm his personal observation and first-hand 
study and research. 

The Use of the Article 

If materials control is well organized along the lines that 
have been suggested, the standard material best suited to any 
given purpose will have been determined. (See Chapter XII.) 
In these determinations, the purchasing and often the engineer- 
ing department should be freely consulted and allowed to play 
a leading part. The resulting specifications which the purchas- 
ing agent receives will describe what is at least theoretically 
the best article. Even then, various contingencies may arise 
which make it desirable for the purchasing department to have 
an exact knowledge of the use to which the article is to be 
put. If the article has not been previously purchased, the 
specifications may be incomplete and it will be necessary for 
the purchasing agent to continue his study of the market until 
he finds what best suits the needs of his company. 

Material will often be suggested as a substitute for a 
previously determined standard. Then his knowledge of his 
requirements will enable him to determine at once whether 
the new product or new quality is worthy of consideration. 
Such knowledge will save time in dealing with salesmen who 
offer material of whose utility to the plant they are uncertain. 
It will enable him to show unsuccessful bidders the unsuita- 
bility of their offerings for the use of the business, and to 
convince them of the fairness of the award should such a 
post-mortem be considered expedient. 



276 PROCUREMENT BY PURCHASE 

When materials control is not well organized, it becomes 
increasingly important for the purchasing agent, who must 
then often personally choose the article best suited to the par- 
ticular requirements, to be well posted as to the manufacturing 
processes of his own plant, and to be in close touch with the 
heads of his production departments. He cannot be omniscient, 
of course. He will realize that to a great extent he must fall 
back upon the technical departments of his organization for 
advice. He may, however, become increasingly self-reliant by 
familiarizing himself with every process and mastering every 
scrap of information that may be conceivably of future value 
to him. One chief object in functional organization is to avoid 
the too close drawing of departmental lines which limit too 
narrowly the executive responsibility. It is the duty of the 
purchasing agent to know whatever will assist him to deter- 
mine the article which best meets his need. To this end it is 
his further duty to consult those who can throw light on his 
problem. 

Questionable Requisitions 

It will often happen that the purchasing department re- 
ceives requisitions that are obviously in error in the quantity 
or quality of the material requested. Theoretically the pur- 
chasing agent is justified in filling the request as he received 
it. Perhaps his relations with the requisitioner are such that 
he does not care to question his requisition. Perhaps he is 
secretly not unwilling that an unamiable department head 
should suffer from his own carelessness. If the purchasing 
agent yields to such inclinations he proclaims his own limita- 
tions. He himself should be held responsible for a large share 
of the blame if he allows any questionable item to be filled 
without the confirmation of the requisitioner. He should go 
even further. If he still questions the accuracy or judgment 
of the department head after the requisition is confirmed, he 



I 



THE ARTICLE 277 

should carry his appeal to a higher authority. Only then has 
he absolved himself from any further responsibility for the 
data furnished him. 

Technical Knowledge 

The buyer should know all of the variations of each kind 
of material. He should know their physical properties or 
chemical analysis. He should be familiar with the processes 
of their manufacture and with the factors on which their costs 
and deliveries depend, li he is to buy steel he should know 
the properties and the processes of manufacture of all kinds 
of steel and iron as well as of the particular grades of steel 
that he is to buy. He should know the costs of production, 
on what factors quantity production depends, the source of 
raw materials, and whatever might affect the supply in the 
immediate future. 

All of this information is a part of the expert buyer's 
stock-in-trade and gives him his right to his title. Strip the 
buyer of his technical knowledge, and he becomes merely the 
commercial agent whose function is to collect data, to close 
the best bargain he can in the light of those facts, to effect 
the delivery of his purchases, and to complete the contract by 
verifying the vendor's invoice. To the extent to which the 
purchasing agent can bring to his duties a store of technical 
knowledge and a scientific grasp of his problem, to that extent 
he adds to the importance and dignity of his calling and to 
the intelligence with which he performs his task. 

This technical information is put into practice whenever 
the purchasing department goes into the market or prepares 
its purchase order. Unless the buyer specifically defines the 
materials sought in terms which cannot be mistaken and which 
cannot be taken to describe any other article, the vendor will 
have the opportunity and the right to ship anything which 
falls within the limits of the general trade term by which 



278 PROCUREMENT BY PURCHASE 

goods are ordered. It is necessary, therefore, in ordering, to 
prepare a specification which will clearly define the limits with- 
in which the goods must fall to be acceptable. 

Specifications 

The following abstract from the annual report of the 
Director of the Bureau of Standards aptly summarizes the 
situation : 

A standard of quality for a given material may sometimes 
take the form of a sample of that material with which other 
materials of the same kind can be compared, but this is gener- 
ally a makeshift of the poorest sort. It is only resorted to in 
the absence of definite and reliable specifications in terms of 
measurable properties ; that is to say, a standard of quality of 
a material usually takes the form of a specification or defini- 
tion of its properties, involving, of course, the measurement 
of these properties by means of the usual standard of measure- 
ment. 

The questions then arise : Why is it good or poor ? What 
are the physical or chemical properties or the particular com- 
bination of elements which make it of good or poor quality? 
How are its properties to be measured or its constituents de- 
termined ? These are questions for the laboratory to answer and 
involve physical and chemical investigations of the most diffi- 
cult sort. 

A standard of quality for a given material necessarily takes 
into account the purpose for which the material is to be used. 
To set the standard too low results in losses, poor efficiency, 
and even loss of life; to make it too high may result in pre- 
cisely the same thing; that is to say, the material must be 
suitable for the purposes intended, and the United States Bureau 
of Standards' investigations in connection with the properties 
of materials are to enable the user of these materials, first, to 
select intelligently the material best suited for the purpose; 
second, to specify it in terms which the producer cannot mis- 
take; and, third, to make the necessary tests to ascertain 
whether or not the material supplied is in accordance with the 
specifications. 



THE ARTICLE 279 

The subject of correct specifications has been called the 
most important element in purchasing. Some material is 
recognized by the use of ordinary commercial terms, and 
detailed specifications and drawings are hardly necessary. 
However, the more frequent the purchases of a given com- 
modity, the more essential specifications become. With 
important purchase contracts covering important materials and 
special machinery or equipment, however, the procedure must 
be completed. Such material must be fully described in de- 
tailed technical terms carefully prepared in advance by the 
technical experts of the plant, and upon its receipt it must be 
subjected to the special tests of the technical inspectors before 
it is accepted. In view of all that is involved, such specifica- 
tions cannot be too precise in their wording or too detailed 
in their scope. On the other hand, they need not, of course, 
be made up individually for every article needed. If a con- 
cern uses fifty different sizes of one grade of steel, a single 
technical specification will cover all of the fifty require- 
ments. 

When a purchasing order is sent to a vendor the specifica- 
tion should either be written in the body of the order, or a 
clause should appear in the contract to the effect that the ma- 
terial is to be "in accordance with specification number 

which is attached and which forms a part of this contract." 
Typical formal specifications as used by the United States 
Government are shown on pages 1 51-153. 

Classes of Specifications 

The writing of formal specifications has already been 
covered in Chapter XII, "Standards and Specifications." It 
remains now to inquire as to the characteristics of contracts 
with which specifications are used. 

Specifications may be divided into two classes, the second 
of which may be subdivided : 



28o PROCUREMENT BY PURCHASE 

I. Those used with purchase order contracts for standard 
materials and current requirements of materials regularly 
purchased. These specifications are not usually required 
to be formal, but may be trade descriptions, etc., em- 
bodied in the body of the contract. 

2a. Includes those used with future requirement contracts or 
contracts of broad scope for these same or for similar 
materials but which require formal specifications based 
on technical or engineering data to save confusion at 
some distant time of delivery. 

2b. Includes those used with purchase order contracts for 
mechanical equipment, unusual materials, plant betterments, 
and extensions, special equipment or apparatus requir- 
ing specifications of a very exact engineering or tech- 
nical character. 

It will be understood that there can be no final division 
of the commodities purchased into these two main classes, in- 
asmuch as general business conditions, conditions within the 
industry itself, or conditions in one or more outside industries, 
may or may not make it desirable to make a large number of 
future requirement contracts. 

For example, a purchasing agent who had made a future 
requirement contract for pig iron, or as a matter of fact 
almost any other commodity, during 1915 or 1916 and 191 7. 
was in an extremely fortunate position providing he could get 
delivery, because of the fact that during those years com- 
modity prices advanced steadily. On the other hand, a future 
requirement contract for pig iron for delivery during 1918 
was of little advantage during a part of the year, owing to 
government price fixing and allotment. No matter how legal 
his contract or how pressing his requirements, he could not 
get the iron without authority from the proper bureau in Wash- 
ington. While during 1914 to 191 8, the far-sighted purchasing 
agent made as many future requirement contracts as he could, 
consistent with his need, at the time of the signing of the 
Armistice the wise ones would make no future requirement 



THE ARTICLE 28l 

contracts, except to take advantage of quantity prices, and 
then they endeavored to insert a clause in the contract protect- 
ing themselves against a decline in prices. Today most of 
our contracts fall within class i, that is, they are in the form 
of purchase orders for material required for current use. 

Materials from Vendor's Stock 

All material under i does not require the use of detailed 
specifications. Bolts, for example, can be easily defined by 
terms which are known to the trade. By using trade terms 
it is possible to buy any kind of bolts desired. They have 
been manufactured in exactly the same way for years by a 
number of different companies. The qualities and the sizes 
have become standardized. It is the purchasing agent's busi- 
ness to know qualities and sizes ; the knowledge belongs to the 
elementary part of his equipment. 

Oil, on the other hand, is usually sold under brand terms 
and without standards of quality. Having determined the use 
to which it is to be put and the properties it must have to fill 
adequately the need and knowing the properties of various 
kinds of oils, the buyer can specify the brand of oil which 
chemically and mechanically will meet the requirement. The 
value of coal depends entirely upon its heating possibilities. 
Hence it may be purchased on a b.t.u. basis with a specified 
limit as to the percentage of waste. In the purchase of 
materials of this nature, whose quality does not appear on the 
surface, the danger from competition enters. Each dealer may 
safely assert that his product is superior to any other and 
better meets the requirement — statements which are not to be 
taken as fact until proved by the consumer's analytical tests. 
Here one must proceed by specifying coal according to the 
limits of volatile matter, ash, sulphur, etc., and testing each 
carload by the analysis of samples. The use of ambiguous 
terms such as pea, nut, or stove in specifying size of coal is 



282 PROCUREMENT BY PURCHASE 

taking a chance, for what is pea to one vendor has been another 
size to a second vendor. 

Materials Record 

Since every executive finds himself more and more de- 
pendent on his purchasing agent for technical knowledge along 
certain lines, the keeping of a detailed record of each important 
class of material is a matter of great importance. The sudden 
loss of a purchasing agent may become a very serious matter 
unless he has had his accumulation of knowledge tabulated. 
On the other hand, such a record will make the purchasing 
agent increasingly independent of his expert advisers in the 
organization. It will strengthen his own hand by making him 
sure of doubtful technical details, and will strengthen his 
strategic position as an expert buyer whose stock-in-trade is 
his knowledge of what the market offers. While no one 
expects him to be an expert in all lines, the materials record 
will go a long way towards making him one. It will also be 
found very useful in answering inquiries from other parts of 
the organization, such as the engineering department, regard- 
ing what the market offers in the way of standards and their 
relative costs. When requisitions for special materials are 
received, he has a fund of information at hand showing at a 
glance the possibility of finding the materials in the market. 
All the technical information that comes to the purchasing 
department, especially that which deals with the different var- 
iations of material that can be secured and the relative varia- 
tions in cost, will find their proper place in the materials 
record. 

On account of its varied nature and the fact that the 
data on no two commodities will be the same, the record can- 
not be maintained on a form. Instead of the use of a standard 
method of compiling the data, a narrative of the matter will 
be found useful. The possible quantity of data on any phase 



THE ARTICLE 



283 



of one commodity will differ from every other, hence the 
discussion affords sufficient possibilities of inclusion to suit 
any statistician. The original record will probably be a dic- 
tated and typed statement of fact. This can be placed in a 
standard-sized letter file folder, with additional data as it 
comes to hand from time to time, and copies of all subsequent 
specifications applying to the particular material. After a 
while the original story of the commodity can be revised, 
corrected, and rewritten to incorporate the facts discovered 
later. 



An Illustrative Record 

The nature of this record is partly specific and partly gen- 
eral. The use and character of the record can probably best 
be shown by one specific record pertaining to paper : 

Trade Names: Book, writing, kraft, manila, news, bond, ledger, 
laid, etc. If sizing is added to book paper when 
in process it becomes writing paper. When a 
different kind of sizing is added and it is given a 
special finish, it becomes cheap bond paper, etc. 
All kinds are usable for printing purposes. The 
grade to be used depends upon the use to which 
the printed matter is to be put. 

Finishes: Book paper with a special water-marked finish is 

laid paper. Linen paper is bond paper specially 
finished; etc. 

Composition : The cheapest papers are made from wood pulp ; the 
best from new rags. There are many intermedi- 
ate mixtures. Grades of "all-rag" papers vary 
according to the grade of rag used, and some 
mixed papers are better than low-grade "all- 
rag" paper. 

Substitution : Kraft and other coarse papers when well finished, 
although not so attractive, can be used as sub- 
stitutes for more expensive bonds in practically 
any case with a great increase in strength. 



284 



PROCUREMENT BY PURCHASE 



Sizes ; 



17 X 22 and 22 X 34 are the most common and 
easiest sizes of bonds to secure on the market; 
the other grades have different best-known sizes. 
Special sizes increase the price over that for 
standard sizes, but they usually can be secured 
at no additional cost when ordered in lots of four 



Quantity 
Prices : 



Special Water- 
marks: 

Controlling 
Production 
Factors : 



If ordered in case lots, about 500 pounds, the cost 
is approximately i cent less per pound than in 
less than case lots, largely due to saving in pack- 
ing, etc. 

Special water-marks with a high advertising value 
can be secured with no additional cost if a suffi- 
cient quantity is ordered. 

The scarcity of water in the seasons of draught 
which often visit New England may tie up pro- 
duction and deliveries because of the large 
amount of water required in paper manufactur- 
ing. A scarcity of wood pulp, most of which is 
imported, raises prices and effects delivery. In 
an advancing market, the cheaper the paper, the 
greater the rate of price increase. 



This and much similar data is information which a sales- 
man does not readily give, especially if he is attempting to 
sell a product which can be replaced by another vendor's prod- 
uct to the advantage of the purchaser. It becomes a difficult 
proposition to get from the salesman information of this 
character for inclusion in the record or in making an actual 
purchase, but the data can be obtained somewhere in every 
case. With an adequate record of this kind a new purchaser 
could buy with more ease and without showing his real 
ignorance of the subject. The record would supply many of 
his deficiencies. 

This information should be recorded in concise form, for 
every kind of material which the purchasing agent may be 
called upon to supply. The record should include all available 



THE ARTICLE 285 

newspaper, trade and technical paper clippings, salesmen's hints 
and the buyer's experience. Such information will make it 
possible for the purchasing agent to delegate his functions to 
a subordinate with the assurance that without special knowl- 
edge and training he will have at his disposal the leading facts 
concerning the desired commodity and can proceed with in- 
telligence. 

Origin of Purchase Order Requisitions 

It may be well to diverge at this point to obtain a brief 
picture of the procedure of the purchasing department in 
handling an order which is governed by standard specifications 
previously determined. 

There are two general theories in regard to who should 
be allowed to write purchase order requisitions. Some con- 
tend that any member of the organization should be allowed 
to write requisitions for materials which are not stocked. 
Others say that only the materials control department should 
write requisitions. 

Under the first plan anyone desiring material must first 
determine if the material is stocked or not, and if not, whether 
it would be purchased or manufactured, what is considered the 
organization's standard for that kind of material, and the 
proper quantity to order. The second plan considers it a waste 
of time to bother the one desiring material with details in 
which he is not interested. If for the sole sake of easing him 
of the detail, let him write a stores requisition for the material, 
stating what he wants and when he wants it, and let him send 
the requisition for the material to this service department of 
specialists who write most purchase order requisitions and who 
know how to handle those matters and to carry them through 
to completion. In a large concern, he is more likely to get 
better service. 

By the first plan, the contract with the purchasing depart- 



286 PROCUREMENT BY PURCHASE 

ment is more direct, only one paper transaction takes place, 
and the accounting is somewhat simplified. This plan is the 
one illustrated in the routine in this text. 

Checking 

On receipt of the purchase order requisition (Form 57) 
calling for material already standardized by definition and 
specifications in the records of the purchasing department, it 
will be reviewed by a clerk. 

The requisition clerk will see that it is signed by the proper 
authority, that it is correctly dated, and that it carries all of 
the required information. Most important of all, it is essential 
that the material be clearly defined and identified with any 
specifications which may have been placed on file or are attached 
to the requisition. If the requisition fails to meet these require- 
ments, it should be returned to the originator for correction. 
If the material requested does not conform to the standard 
requirements in every particular, it must be made to do so. 
To this end a conference with the head of the ordering depart- 
ment may be expedient, because usually such head will not be 
permitted to depart from the standard specifications in framing 
his requisition without the authority of a competent superior. 
But on occasion the purchasing agent must not hesitate to fill 
a requisition of this kind even without confirmation by a 
superior, unless he is willing to take the responsibility of caus- 
ing delay and inconvenience to the ordering department. 

Use of Data 

Having checked the requisition, the clerk must next com- 
pare it with his materials record and other records and review 
the available data bearing on the commodity in question. With 
the additional data of the requisition he should be prepared 
to proceed intelligently in selecting the proper article. When 
and where to get it most advantageously will be discussed later. 



THE ARTICLE 



287 





i 

I 
i 

i 
3 

< 


TO PURCHASING DEPARTMENT 




PURCHA5E ORDER REQUISITION NO. 25003 
DATF WRITTFN 


PLEASE SECURE THE FOLLOWING MATERIAL BY . . 




QUANTITV 


UNIT 


STORES SYMBOL AND LOCATION 


SPfcincATioNHa to be used for 


TITLE AND DESCRIPTION OF MATERIAL 


REQUISITIONED BY. 

OR 

ORDERINfi C 

QUANTITY f 




WRITTEN BY 


APPROVED BY 


)R0ERINO 
>OINT 


i 
a 

Q 

J 



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BIDDER 


SeORCE OF 
gUOIATlON 


LIST 
PRICE 


TRADE 
DJiCOONTi 


NET 

ppice 


F.O.O. 
POINT 


TERMS 


DELIVERY 
PROMISED 


BEL. 














































































































































































































































































































































































































NOTES -AixouoTATioNa must be BEceiveo 6Y 


REOUISmONeQ.WAS HOTIFIED 

THAT HATrntAL CANNOT BE 

DELIVERED UNTIt. 


5HIPPE 
SHIP VI 


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5CHCD. Div. 






QUOTATION RECOBD 
POSTED BY 






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QUOTATION OIV, 


OUOTATIOM Dl^ PunCH. 0&^, 1 



Form 57. Purchase Order Requisition. (Size 8j^ x 11.) 
The upper part of this form carbons with Form 10. It is similar to Form 17. 



288 PROCUREMENT BY PURCHASE 

Orders Applying on Blanket Contracts 

Requisitions for material which is already covered by a 
standing contract are also subject to checking for the purpose 
of reconciling them with the contract terms. The material 
record in these classes will still be useful, especially in those 
types of contracts which do not specify any one grade or size 
of the commodity but allow the buyer to order over a range 
of grades or sizes. 

The Quantity 

The quantity of an order is an important consideration. 
The proper quantity of a commodity not carried regularly in 
stock is determined by the size of the order in the completion 
of which it is to be used, as discussed in Part II. If the article 
is carried in the regular stores permanently, the quantity will 
be determined by the requirements of the business, the season 
of the year, the facility with which it can be obtained, and 
similar factors, as discussed in Chapter XI on "Control of 
Inventory." Thus the quantity desired to be purchased will 
be clearly indicated on the requisition. 

While it is not incumbent on the purchasing agent to 
determine the quantity to be purchased, it is quite within his 
province to question the possibility of an error in what may 
appear to be an inadequate or an excessive amount, and to 
consult the originator of the order, if there seems an oppor- 
tunity of saving money in the purchase price by increasing or 
decreasing the quantity called for by the requisition. For 
instance, a requisition may call for 450 pounds of paper when 
a 500-pound case would secure a 5% or 10% saving. Again, 
when deliveries are tightening and prices rising, an increase 
of the quantity may be expedient; or when the market is 
dropping, a decrease may be advisable, etc. In periods of 
retrenchment or of expansion, suggestions of this kind from 
the purchasing agent are particularly valuable. 



THE ARTICLE 289 

Control of Requisitions 

Requisitions vary in their importance and urgency. In a 
large concern only the most important need pass through the 
hands of the purchasing agent himself. Those covered by 
contract need never be reviewed by him, but may be written 
up at once, if the checking has shown them to be in proper 
order. The vigilant buyer will so closely supervise the work 
of his department as to prevent it from becoming too auto- 
matic, lest items which he should review be ordered without 
his knowledge. He will insist on seeing personally every order 
which is new or unusual, or which is over a certain limit in 
value. 

Frequently it will be the chief clerk or assistant purchasing 
agent of the department who will review all requisitions, 
determining which ones should receive the attention of his 
chief. This method usually provides a sufficient control. 

Similarly, the relative order in which requisitions are to 
be handled may be determined at the outset by someone whose 
knowledge and judgment will prevent the side-tracking of 
orders on which prompt delivery is doubtful or for which 
the need of the plant is urgent. 

Fixing the Price 

The last step of the essential procedure before the placing 
of the order is to fix the price. If the requisition calls for 
material which has already been contracted for at a definite 
price, all that is required is to insert the contract price, to 
indicate the time and point of delivery, and to note that the 
order is to be filled under the terms of the contract. 

If the material is a new commodity or in a changing mar- 
ket, it may be necessary to request competitive bids of a num- 
ber of reputable firms. This phase of the subject will be 
discussed in a subsequent chapter (XXIV). 



CHAPTER XXII 

THE MARKET 

The Background 

We have already indicated how essential it is that, the 
article which is required having been determined, the purchaser 
should know the market in which it is to be procured. Like 
all other factors of purchasing, the market presents a large 
background with which the purchasing agent must be per- 
fectly familiar before he can expect to place his contracts to 
the best advantage. 

This background consists for the most part of a mass of 
information and more or less scientific knowledge. Much of 
it is general and of a nature to defy tabulation, but most of it 
is concrete, specific, and immediate. Reduced to record form 
and incorporated in the files of the purchasing department, it 
becomes part of the stock-in-trade of the purchasing agent. 

Knowledge of materials in general is even more important 
than the knowledge of the use to which they are to be put. 
Here is a line of research which the purchasing agent must 
pursue for himself alone. In this field he should make himself 
a specialist. He should not depend for his knowledge upon 
the department heads, and the extent of his specialized and 
exclusive knowledge of this subject and of market conditions 
may well be the measure of his value to his employer and his 
standing in his organization. 

Knowing what he wants, the buyer must know what the 
market offers and how it is offered. He should know what 
he can get and where he can get it. Sometimes the sources of 
supply will be numerous and sometimes they will be few and 

290 



THE MARKET 29 1 

difficult to Stimulate to prompt deliveries. The sources of 
supply are not to be determined or even located in a hurry. 
The data bearing on this phase of the purchasing agent's prob- 
lem must be built up slowly and carefully. 

In this chapter we are chiefly concerned with the general 
consideration of the market rather than the study of the 
individual vendors, which is treated in a subsequent chapter. 

Forecasting the Market — General Information 

The old proverb — coming events cast their shadows before 
them — is particularly true of economic conditions. The pur- 
chasing agent may have anticipated his needs with contracts for 
a certain commodity for a long period in advance and may feel 
safe. In such a case, unless something unusual should occur, 
he might not feel the need of consulting any statistics for that 
commodity for some time. Nevertheless the periodic study of 
all data enables him to forecast the situation for a still longer 
period in advance, in which case the time so spent will have 
paid him well. 

The buyer must know the general condition of the market 
in which he is to make his purchases. He must be a close 
student of current prices and of the daily news that has a 
bearing on them. He must be able to anticipate any tendency 
towards an advance or a decline either in the general market 
or in the particular commodities that interest him. If he has 
the authority to originate blanket contracts on his own re- 
sponsibility, he will find here a broad field for personal initia- 
tive. Here he has the opportunity to make a record for 
himself by applying his knowledge of market conditions with a 
view to making substantial savings by timely purchases. Even 
if he has no such authority, he should not neglect any 
opportunity to make suggestions bearing on the making or 
even cancellation of contracts, emphasizing thereby the 
economic importance of his office. 



292 PROCUREMENT BY PURCHASE 

A knowledge of the general conditions prevailing in the 
market enables the purchasing agent to lay down a general 
policy which can govern all his transactions and provide a 
deciding factor in questions of detail. Spending half his time 
in reading financial and trade papers may be justifiable at 
times. Thus news of threatened transportation congestion, 
owing to lack of fuel and threatened strikes or embargoes, 
may suggest the purchase of supplies in anticipation of the 
season's needs and the stipulation of a delivery date somewhat 
in advance of the time requested by a purchase requisition as 
the date on which the goods will be needed. 

To illustrate, a certain concern used a very large quantity 
of standard reamers, taps, and other small tools of one manu- 
facturer whose product had been adopted as standard quality. 
It absolutely depended upon that one brand. The purchasing 
agent in his daily reading of the papers noticed that that 
manufacturer's city was threatened with a machinists' strike. 
Accordingly the market was gleaned and orders were rushed 
through to fill his requirements for several months. The tools 
were secured and in his storesrooms when the strike went into 
effect. While other manufacturers had to worry along with- 
out their favorite tools, he was supplied throughout the critical 
period. 

In periods of general prosperity prices are high and un- 
stable and conditions demand that only the most pressing orders 
should be placed to cover the period before prices begin to 
drop. Then comes a period of declining prices in which the 
purchasing agent may continue to buy lightly until his observa- 
tions tell him that the bottom has been reached and the period 
of improvement has set in. Then he may inaugurate a general 
policy of purchasing for future requirements, contracting as 
far ahead as his resources will permit, but all the time watch- 
ing the market narrowly for sudden changes and advantages 
that may demand a modification of his general policy. 



THE MARKET 293 

It may be that this data bearing on market conditions will be 
compiled by a central statistical department under the super- 
vision of some other executive. But even if none of this 
work is done in the purchasing department, these records must 
be constantly available to the purchasing agent. They should 
be referred to him as a matter of routine as rapidly as they 
are compiled rather than await the time when he calls for 
them. Business conditions are constantly changing. The pur- 
.chasing agent may not recognize his immediate need for cer- 
tain data until brought to his attention, but it is fairly certain 
that such material is of greater value to the purchasing agent 
than to anyone else in the organization. 

Statistical Agencies 

Many purchasing agents seek the aid of outside agencies 
in gathering the general information that will determine their 
broad policies. While no buyer can rely entirely on the opinions 
of others in regard to what the market is about to do, such 
agencies provide a means of comparing the opinions of others 
with his own. This gives the buyer confidence in himself if 
the opinions agree, or causes him to review again and perhaps 
change his opinions should they disagree about the general 
trend or about any commodity. 

There are several good professional statistical agencies 
which at small cost furnish such information to their clients. 
Many banks and commercial houses furnish such information 
to their customers as a part of their regular service. They 
issue periodic reports concerning the market situation both in 
its general trend and in regard to its leading commodities, as 
illustrated by Form 58. Both phases are essential. The mar- 
ket situation in a single commodity may be entirely different 
from the general market conditions, though in general com- 
modities somewhat follow the general trend of the entire 
market. 



294 PROCUREMENT BY PURCHASE 

Babson Opinion on "Coal Outlook" 

A successful solution of the present labor controversy in the coal 
fields is not visible. Still the situation from a price standpoint is not 
serious. There is no scarcity of coal and there is no indication of any 
shortage for some time to come. The effect of the strike has estab- 
lished a rate of output even lower than the curtailed volume during the 
dispute in late 1919. Production last year of 407,000,000 tons, ruled 
materially under the previous ten-year average — fully 23%. Note 
production and price chart below (Form 62). Consumption, however, 
reflecting the period of depression and the status of industry, was 
fully 27,000,000 tons less last year than the restricted output. As a re- 
sult, stocks on hand at the turn of the year were above the normal com- 
plement and during the first quarter of 1922 the available supply 
increased substantially. The present rate of output by non-union mines, 
together with total stocks, will adequately cover the potential demand 
for some months to come. Incidentally, fuel oil competition is bound 
to increase. . . . 

Babson Commodity Outlook 

(A small section of the Babson opinion on certain commodities 
is shown here.) 

Cocoanut Oil — Supplies ade- Leather — Sole — Protect seasonal 

quate. Yet, prices are conducive needs. Moreover, be prepared 

to moderate purchases for several to buy more heavily if attractive 

months ahead. purchasing levels materialize. 

Coffee — Continue to take advan- Upper — Purchase as with sole, 
tage of all substantial set-backs. Lemons — We still feel that sea- 
Irregularity should continue. sonal purchases on weak spots 

Coke — Foundry — Clients by this will later react to advantage, 

time should have on hand ade- Lime — Cover adequately for 1922 

quate quantities for a month or needs, postponing extensive in- 

so ahead. This also applies to ventories. 

furnace coke. Linseed Oil — We approve of pro- 

Copper — Refined — Prospects favor tecting seasonal needs. This is 

higher rather than lower market. not the time, however, to get 

Accumulate stocks for future bullish. Seasonal reaction is due 

account. some months hence. 

Sheet — We consider sheet and Lumber — General — Relationship of 

wire a favorable buy for some supply and demand suggests 

months ahead. higher price level. 

Form 58. Extract from Report to Buyers (Babson) 



THE MARKET 



295 



While the reports of these agencies are of value, they 
should not be accepted uncritically. One agency may be an 
excellent authority or a very good guesser where copper is 
concerned and yet rarely anticipate correctly the changes in 
the grain market. The opinions of the various reports con- 
cerning specific commodities should be tabulated in a form 
similar to that illustrated in Form 59. After a few months, 
by comparing such a record with the actual trend of the mar- 
ket, data will be supplied for the criticism of the opinions of 



SUMMARY OF STATISTICAL AGENCY REPORTS FOR COMMODITY | 


MONTHLY 
REP>ORT 


JONES AGENCY 
OPINION 


NATIONAL BANK 
OPINION 


MISCELLAMEOUS 
OPINIONS 


JAIMUARY 








FEBROAPV 

























NOVEMBER 








OeCEMBER 









Form 59. Summary of Statistical Agency Reports. (Size II x 8J^.) 

the different sources of such information without which they 
may conceivably be a handicap rather than a help. After a 
period of time it will be evident how much reliance can be 
placed on each opinion. Each will ordinarily be found to have 
its elements of strength and weakness. Probably none will be 
found entirely sufficient. 

The buyer's knowledge of general business conditions can- 
not be restricted to his own commodities. He should know the 
trend of business in the principal commodities of every country 
and of each section. Depression in such commodities, even 
though he has no direct interest in them, will have an inevitable 



296 PROCUREMENT BY PURCHASE 

effect on economic conditions in the country that produces 
them. On the success of the cotton crops in the South will 
depend largely the prosperity of that entire region, and by its 
prosperity, both buying and selling conditions are determined. 

The most widely unrelated factors contribute important 
evidence as to the trend of business-export statistics, bank 
clearings, building permits, warehouse reports, railroad earn- 
ings, and similar data, must all be considered in determining 
the general condition of the market, and their cumulative 
evidence will usually determine important questions as to the 
time to buy and the extent of the purchase. 

Graphic Presentation 

General data of the kind that we have described are best 
presented by means of charts and diagrams. When we are 
sure that we have obtained the right figures, it is well worth 
the effort to present them in graphic form. Such presentations 
carry conviction where arguments and tabulated statistics fail. 
Here the data is predigested. It carries its message on its face 
and the detailed tabulation of figures becomes merely the evi- 
dence that the graph tells the truth. 

Graphic presentation is peculiarly effective in showing a 
general tendency or a trend of events extending over a period 
of time. There are men who can glance down a column of 
figures and note the variations and the high points and low 
points with reasonable accuracy. But when it comes to a 
similar comparison of three or four columns simultaneously, 
only the highly trained few can accomplish the feat. Yet a 
graph can show precisely the same data in such a manner 
that everyone can grasp the essential facts almost without 
effort. 

Graphic presentation is particularly useful in indicating 
the trend of prices. In Form 60 is shown the rise in the 
price of pig iron during a period of years and its effect on a 



THE MARKET 



297 



commodity of which pig iron is a component part. This is 
the simplest kind of chart and shows at a glance the entire 
relationship between all factors concerned. 

















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ISSe IMS 1900 1901 190!. I«0} 1304 f90» 1906 190/ 1303 1903 1910 1911 I9IZ 1913 1914 1915 /9ie 1317 I9ia 1919 

Taken from /ron Age, January I, 1920 

Form 60. Graph Showing Price in Dollars per Gross Ton of Basic Pig, Valley, 
and Steel Bars, Pittsburgh 

This illustrates how the price of a manufactured product follows the price of the basic raw 

material. 



How to Make a Graph 

Graphic charts are constructed on specially prepared paper. 
The paper is ruled b}^ heavy lines into squares for convenience 
in drawing and then in reading the curve. The heavy vertical 
lines indicate the limits of the time intervals, while the heavy 
horizontal lines represent the prices. The chart is read from 
left to right and from bottom to top, the lower left-hand corner 
representing the starting point of the relationships to be shown. 



298 PROCUREMENT BY PURCHASE 

In this chart the left-hand border represents January i, 1898, 
the next vertical heavily ruled line January i, 1899 ^^^ so on. 
The distance above the bottom line represents the price, the 
base line representing $0 and each heavily ruled horizontal 
line the limits of each $10 per ton increase. 

In the construction of any similar chart, the first step is to 
determine the unit value of each vertical and horizontal space 
which will best express the relationship desired. For instance, 
if a chart has 50 such spaces, each space must represent 20 if 
1,000 is the maximum quantity to be expressed. The values 
are written along the sides of the chart at the proper intervals. 
They serve as scales for the locating and subsequent reading 
of the figures graphed. These figures are then laid off the 
proper distance to the right and upward. At the intersection 
of two imaginary perpendiculars erected on the base lines 
at these points, a dot is placed. This is continued so long as 
figures remain to be plotted. The dots are then joined by a 
curve and the chart is complete. 

In Form 61 we have a graph taken from the United States 
Government Crop Reporter, which endeavors to give its readers 
such information relative to the price records of previous years 
as will enable them to sell at the time that prices are highest. 
Here we must read from the line representing 100%. The 
chart would be made much clearer were this line differentiated 
by being heavily ruled. A graph of this nature should have 
O as a base line. If space forbids this, two wavy lines near 
the base should indicate its remoteness from O. 

In the chart illustrated in Form 62 showing several rela- 
tionships, the purpose is to show the changes in variations 
between them. This necessitates the use of a heavy line 
indicating the basal commodity, and of thin and dotted lines 
for the other relationships, or we may use several colors of 
ink. That this information is brought out much more point- 
edly in chart form than is possible by a long column of figures, 



THE MARKET 



299 



is apparent. Who would have the patience to follow the sta- 
tistics for many years, tracing the many changes in price? 
Every peak and depression is suggestive, giving glimpses of 



1909 



1910 



1911 



1912 



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UNITED STATES GOVERNMENT CROP REPORTER 

Form 61. Graph Showing Fluctuations in Price of Eggs in United States as 
Compared with Average of Monthly Figures for Four Years 

fat and lean years reflecting the various developments and 
various influences and the constantly changing demand for the 
product. 

In some charts we may wish to show several relationships 
on a single graph, such as the supply of a commodity on hand 
as expressed in quantity and in value, for the purpose of 
determining to which relationship is due the increased or 
decreased values, as is shown in Form 63. In such cases the 
starting points might be the same point but the unit value of 
the vertical spaces will be different and the three curves will 
diverge from the one starting point. In order to avoid con- 



300 



PROCUREMENT BY PURCHASE 





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THE MARKET 



301 



fusion we may note the second value beside the first in the 
same colored ink as we use in drawing the curve. 

The purchasing agent who keeps a few charts over a period 
long enough to be of value for comparative purposes will 
develop an outlook on the future that will surprise himself. 
He will find himself able to forcast conditions and tendencies, 
often with uncanny accuracy. For instance, he will be able 
to determine that period of the year in certain trades in which 
producers drastically cut their prices to encourage sales in order 
to operate their plants at maximum capacity throughout the 



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>»ai I90Z 1905 1904 1505 I90e 1907 isce 1905 ISfO /S/l ISIZ I9I3 19)4 1913 (916 1917 I9IS 1919 



Form 63. Graph Showing How the Value of Three Relations Diverge from a 
Common Point as the Relationships Change 

It illustrates how in periods of high prices the value of an inventory skyrockets out of pro- 
portion to the increase in stock necessary to conduct a business over the period of prosperity, 
and how in the period of declining prices the replacement value can drop faster than the 
stock on hand. Hence the great necessity to watch inventories and contracts in order to 
conform with market conditions and finances. 



year. In determining the details incident to the renewing of 
a contract that extends over any considerable period of time, 



302 PROCUREMENT BY PURCHASE 

the only scientific procedure is to consult such charts as an 
indispensable preliminary to judging what is best to do. 

The fact that the purchasing agent has made a contract 
covering a number of years does not mean that he is no longer 
obligated to keep a faithful record of prices. He must always 
be able to present evidence that the contract was a wise one, and 
the best evidence is a history of prices of the commodity since 
the contract was made. Even if such evidence proves the 
contract to have been unwise, the record will be useful not only 
in demonstrating to him the weakness of his judgment, but 
in helping him to avoid such a mistake in the future and 
possibly even pointing the way to the making of a supple- 
mentary contract which may overcome a part of this con- 
tractual loss. 

Charts need not be restricted to recording prices. They 
may be equally effective in showing stock on hand, consump- 
tion, deliveries, and a mass of similar data. Some charts to 
be of value must be adjusted in detail every day, while others 
in periods of comparatively little activity need be plotted only 
once or twice each month. Then when the chart covering less 
active data shows a critical period, the intervals can be de- 
creased to one day instead of one week or one month. This 
gives the maximum benefit with the minimum of clerical work. 

Specific Information 

Besides the general information discussed above, there is 
a mass of specific and immediate data that must be maintained 
and applied to each transaction While all of this is directly 
applicable to the market, the compilation and maintenance of 
such data is discussed under those phases of the purchasing 
cycle in which it is even more applicable. 

First of all, the buyer must know what the market offers, 
and to whom to turn for whatever he may want. He will 
know and have recorded all the essential data on every source 



THE MARKET 303 

of supply which is a part of the logical market for the com- 
modity in question. If he is foresighted he will also know 
as well to whom he may go in case of emergencies when strikes, 
embargoes, and similar influences have eliminated his logical 
market. 

Under this head will also come the specific technical in- 
formation discussed in the preceding chapter, and which quali- 
fies the purchaser to gauge the market with intelligence and 
understanding. Perhaps his grasp of market conditions is best 
shown by his familiarity with the details which bear on supply 
and demand as reflected in the current price. 

Supply and Demand 

This factor, of course, has its bearing on the general as 
well as the specific problem. An analysis of supply and demand 
will give the data which determine the trend of the market 
and the prices of the future. A marked fluctuation in price 
should call for an investigation. Prices are only the surface 
indication and the buyer will look behind them and investigate 
until he can connect their movements with their causes. The 
buyer who has informed himself of the available quantities 
of a given commodity and of the current market conditions 
will have no difficulty in recognizing a manipulated price when 
he sees it. In such circumstances there is little he can do but 
to avail himself of his knowledge of substitutes or to cover 
himself for short periods and wait for the market to subside. 

In a free and open competitive market, price changes fur- 
nish the key to the conditions governing supply and demand. 
For instance, in the copper market at a given time the demand 
sets the price; buyers come into the market and bid against 
each other for the available supply. If the supply is greater 
than the demand and there is little buying, the vendors may 
depress the price in order to bring more buyers into the mar- 
ket. A lowered price is likely to make it impossible for some 



304 PROCUREMENT BY PURCHASE 

producers to continue to produce at a profit. They eventually 
drop out of the market, diminishing the supply by the amount 
of their production When the total quantity wanted by the 
buyers is greater than the supply offered by the remaining 
producers, the buyers must raise their bids until more producers 
return to the field, increasing the available supply by the pro- 
duction of those who could not afford to produce at the previous 
price but who can produce and make a profit at the increased 
rate. This movement of adjustment goes on continually in 
every market open to free competition. 

If the market is manipulated, however, and there is a com- 
bination or agreement beween either the buyers or sellers seek- 
ing to hold up the price or hold down production, or to corner 
a commodity or create a monopoly, the market is no longer 
open and free and it becomes necessary for the buyers or the 
sellers carefully to guard against being caught without being 
covered in their requirements or in their supply. 

The Personal Side 

Surrounded as he is by his accumulation of facts covering 
every phase of his work, the material, the prices, and the 
vendors, the purchasing agent may feel himself independent 
of any of the strategic tactics that his predecessors felt to be 
their chief stock-in-trade. Such an attitude, however, may 
soon lead to a mechanical routine that is neither interesting 
nor intelligent. Even with tabulated competitive bids before 
him, there is still room for the display of considerable acu- 
men, if he is to get the best that the market affords, not only 
in material and service but in price as well. 

The purchasing agent still has a place for all his tact and 
skill and his knowledge of human nature in determining the 
most advantageous method of payment — lump sum, unit price, 
cost plus percentage or cost plus a fee, as described in Chap- 
ter XXIV. He may also exert himself in securing every 



THE MARKET 305 

possible concession in discounts, service, and delivery and in 
making his business and his personal good-will something that 
the salesman will desire to cultivate and preserve. He will 
avoid a too rigid adherence to fixed methods and he will cul- 
tivate a diplomatic procedure and a winning personality. He 
will study his vendors until he knows them and their policies 
as well as they know themselves. Not until he knows his 
vendors as individuals as well as firms can he be said to know 
his market. 

Correlation of Requirements and the Market 

The buyer must continually endeavor to correlate the re- 
quirements of the factory with the condition of the market. 
He must know at any time the amount of the most important 
staple materials that the factory has on hand and how long 
that balance will last. He must know what quantities of that 
staple are on order, are contracted for, and in transit, and 
when they may be expected to arrive. To this end the ma- 
terials control department should send him each week a report 
of the present status of all leading commodities, and his own 
clerks will complete the report by a record of orders unfilled 
and in transit. Such a report is shown in Form 64. In addi- 
tion he should receive an estimate of the requirements for a 
considerable period in the future. This report is illustrated 
by Form 65. 

With these two reports, the buyer has complete informa- 
tion before him and he knows when to hurry more material 
toward delivery, when to take advantage of a sudden market 
opportunity for mailing contracts, and what amount he can 
safely purchase. 

Kinds of Prices 

The buyer who knows his market, who knows current 
prices, market tendencies, and the character of the vendors 



306 



PROCUREMENT BY PURCHASE 





( 1 


BALANCE ON 
UNFILLED 
CONTRACTS 






































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THE MARKET 



307 





PRTIMATF OF rONSlJMPTrON AND BALANCES OF 








OATF rOMPlI FD 


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THIS FRTIMATF Ul rST RP RFVIPWFn WOT 1. ATFO THAN lOi 






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ESTIMATED BY 


ESTIMATED BY 


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DetT. 


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--J, 



Form 65. Estimate of Consumption and Balances. (Size 8^ x ii.) 



308 PROCUREMENT BY PURCHASE 

with whom he deals, will know the nature of the prices that 
are quoted him. Here he should be recognized as a specialist, 
so that his authority and judgment will not be questioned. 
He will be the best qualified member of the organization to 
detect a manipulated price and to differentiate it from a com- 
petitive price. He will know when the price is excessive and 
when it is dangerously low and in either case whether or not 
it merits investigation before rejection. 

Information on Vendors 

The specific information dealing with particular markets 
in which the purchasing agent is actively interested will ulti- 
mately be contained in the files which he will maintain as a 
repository for his information on particular vendors, prices, 
and materials. ' 

This information regarding vendors is of both a general 
and specific nature. In general he will desire to know both 
from whom he may secure certain materials and the business 
methods and practices of the various supply houses, their re- 
liability, and the extent to which they are willing to co-operate 
with the buyer's efforts to secure materials. The vendor main- 
tains a like record of the buyer and it is important that each 
should know the other as both are equally responsible for the 
contract. 

Delivery Conditions ; the Terms of Sale 

The reliability of the house and similar data nmst all form 
a part of such information accumulated and confirmed through 
the study of facts obtained from many different sources, among 
which will be the following ' 

1. Catalogues and advertisements 

2. Classified directories 

3. Salesmen 

4. Experience from trial orders 



THE MARKET 



309 



5. Personal visits to factories 

6. Inquiries among firms in similar lines 

7. Membership in trade associations, etc. 

As a part of the material record described in the previous 
chapter, some information may be recorded regarding sources 
of supply, and the quality and peculiarities of certain vendors' 
products as separate from their reliability. Different vendors 
specialize on various sizes and classes of materials, and it is 
foolish to ask them to supply the material which they manu- 
facture only from necessity or not at all. One buyer solicited 
a jobber of wrapping papers so often for material that he 
could not supply and never had supplied that the seller wrote 
to the concern, respectfully asking them to take his name from 
their list of sources of material. 

The first files for such information would be the record 
of sources. Such information is sometimes recorded on a 
card similar to that shown in Form 66, in a form to be in- 



nFSCRlPTION MATERIAl 


SPFCIFIfATION NO 






NAME or DEALER 


PLANT 


USUAL TIME OF SHIPMENT VIA 


LOCATION 


DISTANCE 


CAPACITY 


FRtiqHT 


EXPRESS 













































































































































































Form 66. Record of Sources of Supply. (Size 6 x 4.) 
Showing where purchases can be made to best advantage. Any special remarks will be 

written on the back. 



310 PROCUREMENT BY PURCHASE 

stantly available although it may be combined with other rec- 
ords. Here should be noted the seller's sources of supply if 
he is a jobber; if a manufacturer, the capacity of his plant, 
the amount of material which he carries in stock, the location 
of the supply, and the best transportation ser^/ice between that 
point and the buyer's location. A record of the capacity of 
the plant will obviate the possibility of giving an order that 
cannot be filled within the specified time. The location of the 
plant may sometimes be a most important factor in saving 
time and transportation charges. Such information will enable 
the buyer to make no mistakes in going into the market eithei' 
in emergency or in a case when he has plenty of time to get 
the material. 

Information as to possible sources of supply is compara- 
tively easy to secure when seeking materials even in a here- 
tofore unknown field — from trade directories, for instance, 
from jobbers in related lines, and from trade papers. Sales- 
men are ample reservoirs of information relative to possible 
vendors. 

In addition to this information, the purchaser should assure 
himself that there is or can be satisfactory competition and 
that the vendor is independent of any combination that may 
have been formed to control prices. 

No vendor should be accepted as reliable until after he has 
been carefully investigated and determined to be a suitable 
party to deal with, financially responsible, and equipped to 
perform any obligations assumed. Generally speaking, the 
purchasing agent will have little difficulty in finding a suitable 
vendor; his problem is to select the best one. It is this phase 
of his work that forms the subject of the next chapter. 



CHAPTER XXIII 

SELLER AND BUYER 

Interrelation of Seller and Buyer 

The seller and the buyer are alike in business to make a 
profit. It goes without saying that neither can make his whole 
profit in a single transaction. From the point of view of both 
of them a permanent relation is desirable. Once a satisfactory 
connection is established, an increased return on a smaller 
expenditure may be expected. Mutual confidence, understand- 
ing, and respect may be regarded as lubricants of the wheels of 
business, simplifying relations^ obviating inquiries and mis- 
understandings, and resulting in an exchange of favors and 
help. Under such conditions, service becomes an element not 
considered as due only when called for in the contract. It comes 
to be tendered gladly out of good-will and a desire to help. 
This will to serve extends often to the point where sellers 
are ready to inconvenience themselves and their organi- 
zations to meet an emergency need of a desirable customer. 
Thus, at the request of a purchasing agent the proprietor of a 
certain printing establishment was known to work personally 
and in addition to hold several employees for over forty-eight 
hours to fill a rush order of one of his customers. 

In the previous chapter reference was made to some of 
the necessities resting upon the purchasing agent in quest of 
material. It was pointed out that close familiarity with the 
vendor's resources, with the quality of his previous service, 
and with his reputation, are essential to successful buying. In 
this chapter we will consider another essential — one having to 
do with the more intimate personal relations between buyer and 

311 



312 PROCUREMENT BY PURCHASE 

seller. This relationship, though less susceptible to standardized 
policy, is no less important in its possibilities for good or ill. 

The doing of business in a spirit of co-operation, repre- 
sented by the printer mentioned above, is the kind to be devel- 
oped and fostered. That spirit does not ordinarily appear 
spontaneously. It is rather the result of conscious effort. It is 
the purpose of this chapter to indicate concretely the factors 
that must be present in business relations, if such good-will is to 
be assured. 

In the first place it is well to remember that every purchase 
and sale agreement involves mutual obligations. The buyer 
agrees to give money and certain services in exchange for the 
material and service supplied by the seller. The contract price 
is not the complete cost of the material to the purchaser. In a 
broad sense, this cost is the price plus the value of the time and 
effort which the buyer must spend to secure the completion of 
the contract on the part of the seller. To reduce this additional 
expenditure by every means at his disposal is one of the duties 
of the purchasing agent. 

On his part, the vendor delivers to the purchaser material 
which has cost him a certain sum of money. To this first cost 
he adds a certain amount to cover selling expenses; and 
finally, a profit is added, before the selling price can be 
determined. The less the expense he is obliged to incur in 
bringing about the completion of the contract on the part of 
the purchaser, the higher he will rate the purchaser and the 
more willing he will be to consider the possibility of a price 
reduction to him. 

It is frequently true of small concerns, particularly propri- 
etary firms or partnerships, that strenuous methods are neces- 
sary to secure payment. There are cases in which proprietary 
concerns have never made a payment over a very small amount 
except just prior to a formal legal action. Large concerns are 
not infrequently as great offenders in unnecessarily increasing 



SELLER AND BUYER 313 

selling costs. Many of them habitually allow their due date 
to come and go without payment, on the theory that the vendor 
should be glad to receive their business regardless of when 
they pay their bills. While in such cases it is rarely necessary 
to take legal action, the strain on the vendor's good-will is 
as serious as it is unfair. Buyers whose firms are careless in 
the matter of payment have no just ground of complaint upon 
discovering that they have failed to secure the lowest price 
possible. But in the cases of those buyers who are punctual 
in meeting their obligations, this is one of the points at which 
the existence of mutually cordial relations may result in 
decided advantage to the purchaser. 

Personal Contact with Vendors 

As touching the relations between buyers and sellers, it is 
also well to remember that the purchasing department has 
two points of contact with vendors : through circular matter, 
and through the personal medium. The daily mail brings the 
vendor to the buyer's desk. His circular letters, catalogues, and 
selling propaganda, generally contain interesting possibilities. 
Aside from the general information as to the scope, policy, 
and character of the vendor's business of interest to the pur- 
chasing agent, they contain suggestions for the sales and 
advertising departments. 

The vendor, on his part, judges the purchasing concern by 
every bit of pertinent information that comes into his posses- 
sion. Such data as he obtains through the usual commercial 
channels is ultimately rounded out by the reports returned by 
his representatives, usually the salesmen, who come in personal 
touch with the purchaser. 

Before the salesman pays his first call, he is usually pro- 
vided with all the information available about the buyer and 
his firm. How detailed this information may be is shown in 
Form 67, which is used by a hardware jobber for every buyer 



314 PROCUREMENT BY PURCHASE 

to be interviewed by his salesmen. This record gives the 
details of the information that help the salesmen to make an 
intelligent and effective first call and to avoid blunders. 

Name : Bryant, Frank V. 

Firm: Chicago Machine Tool Co. 

Business: Machine Tool Manufacturer 

Personal Address: 94 South 58th St. 

Family : Wife, son 8, daughter 6 

Religion : Prot. Politics : Republican 

Favorite sports : Billiards; racing 

Likes to talk about : Theater; Englishmen 

Special friends: Cameron, P. A. for Union Railways 

Influential relations : Brown, City Councilor 

Smokes : Cigarettes 

Drinks : None 

Customer's peculiarities : Erratic, hard to approach 

Form 6y. Vendor's Record of Buyer's Personality 

In addition to this personal data is the general information 
relative to the firm's credit standing, general policies, reliability, 
business methods, and anything else that may have a bearing in 
determining the method of approach and the buying capacity 
and credit limits of the prospect. To this data with which he 
starts out, the salesman adds whatever of present or future 
value he is able to accumulate. A report similar to that indi- 
cated in Form 68 is made in duplicate, one copy of which the 
salesman forwards to the home office, the other being placed 
in his personal file. In the case of a proprietary concern, such 
investigations may extend even to the proprietor's family, 
their thrift or apparent disregard of expense — in fact to any- 
thing that may bear on his credit standing. 

Attitude of the Purchasing Agent 

In view of what has been said above, the attitude of the 
purchasing agent towards visiting salesmen is of obvious im- 



SELLER AND BUYER 



315 



REPORT ON CUSTOMER 

DATE 



FIRM 

NAME. 



PROPRIETORSHIP 
PARTNERSHIP 
. CORPORATION 



PRESENT 
COMMERCIAL 
. RATING 



PERSONAL CHARACTERISTICS OF MANAGERS OR PROPRIETORS: 
TO SALESMAN- USE A SEPARATE SHEET FOR EACH MAN .REPORTED 



NAME OF MAN. 



AGE 
ABOUT_ 



ESTIMATEO NET 
WORTH EXCLU- 
. SIVE OF FIRM INTEREST. 



MARRIED 
SINGLE 



. INSURANCE . 



OPINIONS OF TWO MERCANTILE HOUSES OR MEN IN DIFFERENT LINE OF BUSINESS AS FOLLOWS: 



CHARACTER . 



EVIDENCE OF OVERDUE 
HOME DEBTS 



FIRM DATA: 



LINE OF 
BUSINESS. 



AGE OF 
BUSINESS. 



ESTIMATED 
. NET WORTH . 



INSUR- 
.ANCE_ 



STORE 
APPEARANCE . 



APPOINTMENTS 
AND SITUATION . 



OWN 
. RENT. 



HOW OBLIQATIONS 
ARE MET LOCALLY— 



EVER 
.FAILED. 



ANY SUITS OR 
JUDGMENTS. 



PROMPT 
FAIR 
CONSIDERED SLOW PAY . 



GETTING AHEAD 
HOLDING OWN 
. FALLING BEHIND. 



REMARKS IN DETAIL 
CONDITION OF STOCK AS TO QUANTITY AND ASSORTMENT, BUSINESS POSSIBLE TO SECURE, tlC 



REFERENCES OF AT LEAST FIVE HOUSES: 



Form 68. Report on Customer. (Size 5^ x 83^.) 



31 6 PROCUREMENT BY PURCHASE 

portance. The wise purchasing agent will not assume to know 
it all. The salesman can usually tell him something new about 
his product. Though such information is not to be accepted 
uncritically, every salesman should be encouraged to tell what 
he knows. It is the easiest, most accessible, and sometimes the 
most practicable source of information open to the buyer. 
The greatest favor that the salesman can confer on the pur- 
chasing agent is to give him the benefit of such inside infor- 
mation as he may have relative to market conditions. It is 
usually the salesman who knows first of all when a commodity 
is to advance or decline, and when his factory is in a favorable 
condition for prompt delivery. There is no one to whom such 
information is so valuable as to the purchasing agent. Here 
the man who has kept the salesman at arm's length and has 
made no effort to obtain his good-will, is at a disadvantage. It 
is the frank, human purchaser who has made the salesman his 
friend, who gets from him the inside information that is best 
worth having. 

When the salesman calls, welcome him, make him glad he 
came. If at all possible, have a reception room at the main 
entrance to the office. Have a rug on the floor and a comfort- 
able chair for him to sit on. Do not let the office boy be the 
official welcoming agent of the company. An older man who 
appreciates the responsibility and who is friendly, is the ideal 
representative. A salesman likes to be remembered. Greet him 
by name, and above all do not keep him waiting. He is paid 
for what he accomplishes. Lost time is lost money for him — 
and for the purchaser as well. A salesman's salary or com- 
mission must be enough to live on, and in reckoning the basis 
of either, an allowance is made for a certain amount of lost 
or unproductive time, the cost of which is shifted to the buyer. 

In the salesman's case are credit reports, other reports, and 
confidential data authorizing him to quote any prices and terms 
within certain limits. It is to his employer's present advan- 



SELLER AND BUYER 317 

tage to get all he can for his product. The purchasing agent 
must influence the salesman to open to him those price and 
bargain lists if he is to get his supplies as cheaply and on terms 
as favorable as his competitors. If he is frank and above 
board, if he does not try to make the salesman believe he is in 
the market when he is not but that the time is being produc- 
tively spent, he will be likely to win out. Furthermore the 
purchasing agent should see to it that orders sent direct are 
credited to the salesman. He should make clear the advantage 
of having him as a customer, that his business can be 
secured in fair competition, that his credit is good, and that 
no long waits in securing payment will be necessary. In short, 
the purchasing agent should cultivate the salesman in every 
honorable way, chiefly by square dealing. 

If the purchasing agent shows the salesman that while his 
business may be small in the dollars-and-cents value of pur- 
chases made, it is awarded at less cost in selling expense to the 
vendor than is that of a larger customer, and that his business 
is steady, he has gone a long way toward establishing an effec- 
tive working relation. 

The Legal and the Personal Ties 

The relations of the purchasing department with outsiders 
usually result either in contracts for the delivery of material 
or the laying of the foundation for the placing of such con- 
tracts in the future. Each contract will be bound by two ties : 
one legal, the other personal. It is the latter that makes 
purchasing pleasant and profitable. The purchasing depart- 
ment wants service from the supplier. Whatever service is 
secured over that required by the terms of the contract is 
determined by the extent to which the supplier considers it 
expedient to exert himself. He should ship only first-class 
goods, at the time wanted, and in first-class condition. The 
invoice, correct to the cent, and the shipping papers should be 



3l8 PROCUREMENT BV PURCHASE 

iorwarded promptly. All requests on the marking of packages 
and papers to conform with the buyer's system of handling 
purchases should be observed. These are all small matters in 
themselves but let ten single failures to comply with them 
occur in one day and the program of the purchasing department 
is seriously interrupted. Such failures to co-operate may well 
be remembered when future orders are in contemplation. The 
supplier may have kept entirely within his legal right, without 
apparent loss to himself, or he may not. However that may 
be, it is one of the duties of the purchasing department to make 
the personal tie such that there will be no occasion to consider 
the legal tie. 

The ability of the purchasing department to bring about 
the close co-operation of the suppliers with which it has to deal 
is a most important element in determining its successful 
operation. Such help comes to the purchasing agent either 
because he is valued as a customer or as a personal favor. As 
an example of what may be done by buyers and sellers in 
co-operation, to ease a difficult situation, reference may be 
made to typical market conditions. Every market has two 
distinct and ever recurring phases — the "buyers' market" and 
the "sellers' market." The buyers' market is a time of falling 
prices when the seller is looking for buyers and not finding 
them. The sellers' market is a period of abnormal demand 
and rising prices, when the buyer must exert himself in order 
to secure the desired material at a reasonable price. The diffi- 
culties of both periods may be lessened and sometimes elimi- 
nated if the proper relationship exists between the purchaser 
and vendor. 

In the buyers' market it may sometimes bs worth the 
purchaser's while to oblige a vendor by placing his orders for 
material which he will ultimately need somewhat in advance. 
Whether or not such sacrifice is warranted depends upon the 
value of the vendor's good-will. Such good-will has proved 



SELLER AND BUYER 319 

invaluable to many purchasing agents during the war period. 
They were in many instances almost wholly dependent on the 
willingness of the vendors to furnish the material which was 
well-nigh unobtainable in the open market. It is by his ability 
to induce the vendor to give service when the market is "tight," 
ihat the success of the purchasing agent is in part measured. 
The means available at such times are more often his powers 
of persuasion than any more strenuous methods. At such 
times the purchasing agent may well regret any brusque treat- 
ment of too zealous salesmen and feel the need of a spirit of 
co-operation that he has perhaps done little to further. 

To a certain extent both buyer and seller choose the firms 
with which they deal. While a vendor will not ordinarily 
refuse to do business with anyone who will pay for what he 
receives, there is much that he wants to know about every firm 
with which he enters into a contract. He wants to know the 
reliability of his customers, their credit standing, their methods 
of payment, the amount of business it is possible to secure from 
them, and the extent to which they are willing to co-operate to 
the end that their part of the contract may be fulfilled promptly. 
The standing of the purchaser is always the subject of care- 
ful inquiry, on the result of which will depend largely the 
attitude of the vendor towards his customer. 

Sources of Data 

Data for the vendor is derived from many sources, the 
principal of which are : 

1. The purchaser — voluntary statements furnished by the cus- 

tomer himself. 

2. The salesman — personal reports conveying his general im- 

pressions of the character of the purchaser, his local 
reputation, and the state of his business. 

3. Record of previous experiences as it appears on his books — 

perhaps the most important source and certainly the one on 
which the vendor places most reliance. 



320 PROCUREMENT BY PURCHASE 

4. Credit leagues and trade associations — organizations for the 

mutual exchange of information. 

5. Other firms selling to the same customer — usually a fair 

guide within the limit of the business done by each. 

6. Professional credit reporting agencies. Dun, Bradstreet, 

etc. — of variable accuracy but usually reliable in their 
main outlines. 

7. Bank references — these are usually of a general nature and 

are to be so considered. 

8. Newspaper items and general rumors — meager, general, and 

of doubtful value until investigated but never to be 
overlooked. 

The purchasing agent will realize that he, like the sales 
manager, is one v^indow through which outsiders look upon his 
concern. He will make sure that his representation is worthy. 
What impression he makes will filter through various channels 
to the benefit or misfortune of every activity of his concern. 

Credit Information Forms 

Form 68 shows a typical form used in seeking information 
relative to the purchaser's standing by a jobber selling largely 
to the retail trade. It indicates the scope of such an inquiry 
and the factors that have a bearing on the ultimate standing of 
the purchaser in the vendor's credit department. On this 
standing the purchasing agent's ability to command prices and 
service will largely depend. If circumstances prevent a favor- 
able report, the purchasing agent must accept the handicap 
and endeavor to overcome it as best he can by the force of his 
own personality and the personal relations which he is able 
to maintain with the vendor through his selling representatives. 
When the report is received from the salesman or other repre- 
sentative, the data are carefully reviewed and a judgment made 
regarding the desirability of nurturing the possible customer. 
For permanent purposes the data are recorded in a card file 
of appropriate form for future reference. This information, 



I 



SELLER AND BUYER 32 1 

together with the data showing how the purchaser performs 
his part of subsequent contracts, becomes the index to the 
buyer's character. 

The buyer who resorts to questionable tactics need not 
expect to receive all that is to be desired. That man buys 
here today and there tomorrow, based upon his personal advan- 
tages and tricks. No permanent relation exists or can be — 
and the seller loses all the respect he ever had for this buyer 
who is a detriment to his profession. 

Gratuities and Bribery 

A buyer who accepts gratuities belongs to this class. 
Gratuities in the form of gifts are too often given to a buyer 
with the intention — perhaps unexpressed but nevertheless real 
■ — of influencing his decisions in favor of the vendor's offers. 
In fact the practice has reached such a stage that the Federal 
Trade Commission has asked Congress to enact a law as an 
aid to the preservation of fair and free competition and striking 
at bribery. Quoting from the communication to Congress : 

These bribes take the form of commissions for alleged 
services, of money and gratuities and entertainments of various 
sorts, and of loans — all intended to influence such employes in 
the choice of materials. It is evident that this inexcusable 
added cost is finally passed on to the consumers. 

Bribery is criminal per se. The Federal Trade Commission 
has no criminal jurisdiction. It treats the practice as an unfair 
method of competition. In dealing with commercial bribery, 
as an unfair method of competition, the Commission is entirely 
limited to dealing with one side, to wit, the giving side, and 
has no power to reach the receiver, who is also guilty. 

The practice is one which has been condemned alike by 
business men, legislatures and courts, including among the 
business men, those who have finally resorted to it in self-de- 
fense in competing with less scrupulous rivals or in selling to 
concerns whose employes have extorted commissions under 
threats to destroy or disapprove goods submitted to them for 
test. 



322 PROCUREMENT BY PURCHASE 

How prevalent the practice is now and how great the need 
of legislation seems to be illustrated by the statement of one 
man of prominence in an industry who welcomed the proceed- 
ings of the Commission destined to destroy the practice, with 
this statement : "From an experience of thirty years in the 
industry I don't believe that there is a single house in it that 
has not had to pay bribes to hold old business or to obtain new 
business. Bribery is inherently dishonest and tends to dis- 
honesty and is unfair to competitors and customers, and I don't 
believe it ever will be stopped until made a crime by the United 
States Government." 

Corrupt employes having the power to spoil and disapprove 
materials have been able to bid one salesman against another 
until in many cases they have extorted secret commission, so- 
called, as large as 20 per cent of the value of the goods sold. 

The Commission feels that the stamping out of the com- 
mercial bribery is one necessary step to the preservation of 
free, open and fair competition, and to that end respectfully 
urges that such legislation should prohibit not only the giving 
and offering, but the acceptance and solicitation of any gift 
or other consideration by an employe as an inducement or re- 
ward for doing any act in relation to his employer's affairs or 
business, or for showing, or forbearing to show favor or dis- 
favor to any person in relation to his principals' or employers' 
affairs or business. 

In order to prevent a resort to a common method of corrup- 
tion it is recommended that the law should also prohibit the 
giving of any such gifts or other considerations to members of 
the agent's or employe's family, or to any other person for 
his use or benefit, direct or indirect. 

It is useless to discuss the origin of the practice. It is 
sufficient to know that it exists generally and appears to be 
spreading. The mere suggestion shows that it must engulf 
even those honestly inclined if they desire to maintain their com- 
mercial life in any industry where such practices prevail. 

Acceptance of Favors and Courtesy 

From this report it is apparent that the purchasing agent 
must be fortified to resist the very suggestion of unfair dealing. 



I 



SELLER AND BUYER 323 

The pressure upon him to sell his control over the purchasing 
function for a price may be insistent and powerful. Every man 
must be largely his own judge as to how far he can safely go in 
his personal relations with salesmen who are seeking his good- 
will and his orders. The man who would refuse a cigar or an 
invitation to luncheon might well be considered as leaning 
backwards and exhibiting a narrow-mindedness that borders 
on discourtesy. At the same time, whenever a sense of 
obligation begins to restrict this freedom of judgment, the 
purchaser may well draw back even at the risk of appearing 
eccentric. 

The wise purchasing agent will extend every courtesy to 
every salesman with whom he comes in contact. He will meet 
friendship with friendship and he will know how to win a 
respect and esteem that will prevent the possibility of his being 
considered as a subject for any proposal that he cannot entertain 
with honor. 

Vendor Expects Correct Purchase Orders 

The vendor also has a right to expect that every purchase 
order which he receives shall contain exact information cover- 
ing all points relative to the material which the buyer desires 
to purchase. All the information relative to quality, quantity, 
and delivery should be determined and clearly defined at the 
outset, to the end that further inquiries may be avoided. Con- 
tinued inquiries to obtain facts which the purchaser should 
have supplied at the outset cost both time and money and make 
it more difficult for the seller to complete his part of the con- 
tract. Sometimes it is even necessary for the seller to send a 
representative to clear up an essential point. These unnecessary 
expenditures decrease the possibility of the purchaser obtaining 
a more favorable price on his future orders, depreciate the 
value of his firm as a customer, and strain severely the friendly 
relations between the two organizations. 



324 PROCUREMENT BY PURCHASE 

The Purchaser's Requirements 

As the business-giving party to the purchase contract, the 
purchaser's requirements of the vendor are even more numer- 
ous and he is in excellent tactical position to enforce them. 
They may be briefly summarized as follows : 

The Lowest Price, This is an important object of all 
purchasing agents. Having determined on the right article 
and arranged satisfactory conditions of purchase, the buyer 
wants to feel that he has been quoted the lowest figure at which 
the vendor supplies his product under such conditions- As we 
have just pointed out, the purchaser's inability to obtain it may 
be due to several reasons. It may be the purchaser's indiffer- 
ence to his obligations to give service, coupled perhaps with a 
demand for unreasonable service from the vendor. Perhaps 
the purchaser's attitude has so increased the selling cost as to 
make it necessary for the vendor to protect himself by a higher 
price. He may have taken an unfair advantage of the standing 
and strength of his firm, with the result that he has so lessened 
its desirability as a customer as to place himself at an unneces- 
sary disadvantage. Or the vendor may be quoting a high price 
with the intention of forcing the purchaser to accept another's 
bid. This is one way of tactfully losing a purchaser's business, 
without antagonizing him — a consummation sometimes de- 
voutedly to be wished. 

Reliability. The purchaser has a right to demand that 
the vendor keep his promises. A firm may have the highest 
credit rating and yet be chronically unreliable. The constant 
failure to make performances equal promises will offset finan- 
cial standing, excellent workmanship, and advantageous prices. 
Fortunately, the purchasing agent's information on the ven- 
dor's accomplishments will provide a safeguard against a blind 
repetition of an unfortunate experience with an unreliable 
vendor. 

Honest Statements. Closely allied with the above is 



SELLER AND BUYER 325 

the purchaser's demand that the vendor confine himself to 
accurate statements as to the quaHty of his materials, what 
they will do, and when delivery can be made. Extravagant 
statements as to quality are less frequent since the universal 
adoption of qualitative tests. Irresponsible statements by sales- 
men as to the capacity of their plants and the date on which 
they can effect delivery are more frequent. The purchasing 
agent is justified in holding the vendor to such promises and 
in refusing to do further business with him if he fails to make 
good. 

It is conceivable that the purchasing agent may be indirectly 
responsible for promises that cannot be kept. The salesman, 
overzealous to conclude his sale, should not be tempted and 
even forced, as he sometimes is, to promise the impossible. 
On the other hand he is entitled to the truth. He should be 
given to understand at the outset that the buyer will insist on 
the terms of the contract. He should know that the delivery 
date is bona fide and will be insisted upon, and that on the 
contracted delivery date he cannot request and confidently 
expect an extension of time. 

Service Record 

The buyer should maintain a record of the character of 
service that the vendor usually gives, and something of his 
reputation and financial standing. The buyer is entitled to 
safeguard himself against having his order delayed by the 
vendor's financial inability to carry on his operations and 
against the never-ending inconvenience and demoralization 
incident to doing business with a firm that habitually promises 
more than it can perform. Whether promise has equaled 
performance in a given case can be made a matter of record 
by the use of Form 69, which is self-explanatory. 

Many purchasing departments do not feel the need for 
this information, particularly if they defer payment for ma- 



326 



PROCUREMENT BY PURCHASE 



terial until the material has been delivered and inspected and 
if the actual financial loss as represented in the amount paid 
to the vendor is small. This point of view is unsound. The 
receipt of defective material may disorganize an entire pro- 



DEALER 


MATERIAL SOLD US 


ADDRESS 








FINANCIAL 
CATALOGUE FILE STANDING 




PREVIOUS SERVICE AND REPyTATION 




KEEPINO 
PROMISE 


SMIPPIN6 
PROMPT 


QUALITY 


BUSINESS 
METHOD 


CO-OPtRATlON 


PURCH. 
ORDER NO. 


FILLED 
IN BY 




















































































































































PU«eM»»lNO OePT. RECORD OF OtALERS - ADDITIONAL REMARKS OM REVERSE SIDE | 



Form 69. Purchasing Department Record of Dealers. (Size 6x4.) 
Additional remarks on reverse side. 

duction program, increase production costs, prevent prompt 
deliveries of sales, necessitate the breaking of sales contracts 
and the loss of good-will. The harmful results very often 
cannot be measured in money alone. The chance of such 
accidents are greatly minimized if the purchaser knows his 
market individually and maintains in his vendors' record the 
information which enables him to gauge the strength of future 
promises by the record of past performances. 



Confidence 

This brings us back to that element of co-operation between 
the purchasers and the vendor. The complete performance in 



SELLER AND BUYER 327 

accordance with the preliminary understanding and with a 
spirit of fairness and mutual co-operation of all the varied 
details incident to a sales transaction, generates a feeling of 
conjfidence and good-will which becomes to both vendor and 
purchaser a business asset of incalculable value. It may be 
the deciding factor in future transactions, reducing the service 
cost to both parties and leading to their more successful con- 
clusion. Without the spirit of a square deal there cannot 
be a complete understanding between buyer and seller; dis- 
putes will arise; and the purchaser will always find it hard to 
obtain the price and the service to which he feels he is entitled. 



CHAPTER XXIV 

THE PRICE 

Preparing to Issue a Purchase Order 

The purchase order should contain the terms on which the 
buyer does business with the vendor. In its preparation every 
care should be taken to insure accuracy. Chapter XXI de- 
scribes how the purchase order requisition (Form 57, page 
287) originated, as described in Part II, and how it is carefully 
reviewed upon receipt in the purchasing department to see that 
it specifies exactly what is required, that the quantity wanted 
and the date on which the material is required are clearly 
indicated, and that all other details conform to regulations. 
Then if all the requirements have been met and the requisition 
is in perfect order the purchasing procedure may be se^ in 
motion. 

The second task is to compare the requisition with the 
contract record file. Is there a blanket contract covering the 
material requested? If so and if it is a quantitative contract, 
what is the balance purchasable and is it sufficient to meet the 
present demand? The make-up of the contract record is 
shown in Form 70. If a contract exists, the purchase order 
applying on the contract may be written and forwarded at 
once as all details are already arranged. If no contract exists 
the routine procedure of arranging the price and the details of 
an individual order must be set in motion. 

Quotation File 

To this end the requisition is next matched with the quota- 
tion and past purchase order file, as illustrated in Form 71. 

328 



THE PRICE 



329 



The record for the material to be ordered is temporarily re- 
moved from the file and attached to the requisition until the 
order is placed, so that ready reference to past negotiations 
may be possible. From the previously tried sources of supply 



CONTRACT FOR 


WITH 


DELIVERIES 






RECEIPTS 


BALANCE 
OUTSTANDING 


RECEIPTS 


BALANCE 
OUTSTANOINQ 


purchase! 

ORDER Ma 


DATE 


QUANTITY 


PURCHASE 
ORDER NO. 


DATE 


GtUANTlTY 



















































































































































































Form 70. Contract Record. (Size 6 x 4.) 

the purchasing agent determines where to purchase the re- 
quired article, and from the trend of the quotations about what 
price he may be obliged to pay. If quotations on file are of 
recent date and satisfactory, the purchase order may be written 
at once. If not, bids should be solicited from reliable sources. 
If the sources as shown here seem insufficient, reference may 
be made to the record of sources of material (Form 66, page 
309). In this connection, a further reference to the vendor's 
reliability file (Form 69, page 326) may be expedient, in order 
to review the record of the service rendered by the prospective 
vendor in previous transactions. If these files fail to furnish 
several sources of satisfactory supply, it will be necessary to 
search for other vendors, and to solicit bids from those of 



330 



PROCUREMENT BY PURCHASE 



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THE PRICE 331 

good Standing who are equipped to handle the order. Such 
bids are conveniently requested in the form letter illustrated 
in Form 72. 

Request for Bids 

The request for bids is made out in the purchasing depart- 
ment in duplicate, both copies being sent to the vendor. The 
request should indicate clearly and in detail the delivery date, 
the quantity and unit of material desired, and the conditions 
which the purchasing department expects to include in the 
purchase contract. Whether such conditions will be looked 
upon as so much red tape which the vendor can disregard at 
his pleasure, or a part of the contractional obligation to which 
he will be held and from which it will be dangerous for him 
to depart, depends upon the future policy and attitude of the 
purchasing agent. The request is keyed with the same number 
as the purchase requisition for purpose of cross-reference. 
After note has been made on the requisition of each vendor 
solicited, the record is filed until the tenders arrive. 

Tabulation of Bids 

When the vendors have filled out and returned to the pur- 
chaser the second copy of the "request for bids" with its 
accompanying conditions, all preliminaries to the drawing up 
of the contract may be considered as concluded. As rapidly 
as received, the vendor's price, terms, shipping point, etc., 
are recorded on the table provided for this purpose on the 
purchase order requisition shown in Form 57 (page 287). It 
is assumed that every vendor who has been asked to quote 
prices is a reputable dealer with whom it is safe to contract 
because he is able to fill the order or has sufficient financial 
resources to execute it. If, however, this is not the case, and 
the name of a doubtful vendor appears upon that tabulation, 
a note to that effect should be written in the proper space on 
the requisition form. 



332 



PROCUREMENT BY PURCHASE 



THE BUYING COMPANY 

NEW YORK, N.Y. 
PURCHASING DEPARTMENT 

THIS IS NOT AN ORDER 



Please quote us your 

lowest price for shipment to arrive New York, NY. by 

described below, using the attached duplicate for your reply. 
Your reply should be in our office by 



RCOUEST 

FOR 

QUOTATION 



.192- 



-for articles 



QUANTITY 
AND KIND 
REQUIRED 



UNIT AND DCSCBIPTION 



- - TRADE NET* KL'riNMVS 

PRICE OIS- PRICE FROl" Rtt'T 

PER UNIT COUNTS PER UNIT OF OROCR 



TO RECEIVE CONSIDERATION, YOUR BID MUST STATE WHEN Dl LIVERS' CAN UE MACE 



Shipping Point 

Suggested Route. 



F.O.B. New York, N.Y 
* Subject to terms 



If you are unable to furnish same in accordance with our specifications, quantities, 
etc., or wish to offer substitutes, please give full details, sending samples of sub- 
stitutes, if possible. 

A purchase order accepting your quotation will be covered by the following 
conditions: 

1. All packages must be marked with our purchase order number and contain an 

itemized list of contents. 

2. Invoices and shipping receipts must bear the order number and must be mailed 

on the day of shipment. 

3. Each shipment must be covered by a separate invoice. Articles on one order must 

not be billed with those on other orders. 

4. The right is reserved to cancel any order if not filled within the contract time. 

5. The conditions of order shall not be modified by any verbal understanding or 

agreement. 

6. Charges for boxing and carting will not be allowed unless previously arranged. 

7. The acceptance of our order includes all terms, prices, delivery, specifications 

and conditions stated therein. 



THE BUYING COMPANY 
Please reply on and return copy 2 of +his form as soon as possible. 



Form 72 (a). Purchasing Agent's Request for Quotation (copy i). 
(Size 8J^ XII.) 



THE PRICE 



333 



TO PURCHASING DEPARTMENT 

THE BUYING COMPANY 

NEW YORK, N.Y. 
FROM 



REQUEST 
FOR 

QUOTATION 



J92 



In accordance with your request, we offer you the articles described below at 

our loweet price for delivery to arrive New York, N.Y. by Our quotation is 

subject to the conditions stated on copy 1 of this form. 

Our reply should be in your office by 



spec QUANTITY 



UNIT AND DESCRIPTION 



LIST TRADE NET* Oa'r IN DAYS 

PRICE OS- PRICE FROMRECt. 

PEH UNIT COUNTS PER UNIT OP ORDER 



WE CAN MAKE OELIVCRV AS ABOVE STATED. 



Shipping Point F. 0. B. New York, N.Y 

Suggested Route *3ubject to terms 

We are unable to furnish the above as described and offer substitutes 
as followsi. 



. Shipper 



ttate. 



Reply on and forward this copy to The Buying Co. as soon as possible. 



Form 72 (b). Purchasing Agent's Request for Quotation (copy 2). 



334 PROCUREMENT BY PURCHASE 

The Price 

With the bids before him the purchasing agent is ready 
to consider the price. The purchase contract is to be the 
agreement entered into by the purchaser and the vendor, under 
which the vendor agrees to furnish a certain amount of mate- 
rial for a certain consideration. This consideration must cover 
the sum of two values — the cost and profit values of the 
material to the vendor plus the cost of other factors known as 
service. 

The good buyer is always trying to decrease the cost of his 
purchases. He has no control over the production cost of the 
material but he can reduce the margin which the vendor reserves 
for service and his profit. It is first necessary, however, for 
him to consider the various factors that enter into the deter- 
mination of the price. As previously stated, the selection of 
the right article is the first consideration of the purchasing 
agent, and relatively price is always to be considered of 
secondary importance. Only when two offers are received 
from firms of equal responsibility which give the same service 
and submit identical articles, does price become the determining 
factor. 

The service offered in the bids should be considered as part 
of the value to be received, and, as stated before, the purchaser 
must consider the possibilities and consequences of transportar 
tion or other difficulties, and in the case of the unreliable biddei^, 
the possibilities and consequences of poor service are increased. 

i 
Competitive Prices j 

The advantage of obtaining bids from two or more seller$ 
before placing any order for a considerable quantity of ma^ 
terial has been previously indicated. Whatever may be th^ 
purchaser's knowledge of prices in the market at large, he 
should at least take advantage of such opportunities as com- 
petition between vendors offers him. It is, however, only a 



THE PRICE 335 

waste of time to solicit or consider bids from vendors either 
unable or unwilling to supply goods of the quality desired or 
to finance and complete the order on time if they receive it. 
The custom of obtaining low bids from such vendors for the 
purpose of forcing down the bids of desirable vendors cannot 
be justified on any grounds. The reputable purchasing agent 
will not ordinarily depart from the logical market in seeking 
his sources of supply and from that market he will eliminate 
all except those whom he is sure are able to carry out the 
provisions of a satisfactory transaction. 

There are various discounts to be taken advantage of. 
Many producers maintain a sliding scale of prices theoretic- 
ally based on the size of orders, but practically constituting a 
margin which can be yielded according to the exigencies of 
the situation. Large buyers and many small ones, whose 
trade is desired, are granted a rebating discount based upon the 
amount of competitive business received during a period. A 
-stationery and printing firm grants a 15% rebate on the total 
business received during the month. A hardware concern 
offers a discount on a sHding scale based on the business of a 
year. The buyer is of course justified in getting as much of 
a rebate as he can. Most manufacturers usually sell to jobbers 
at a lower price than to the ultimate consumer, but an excep- 
tion to this rule is occasionally made by giving certain buyers 
the benefit of the resale price. 

Price Maintenance 

In a sense there is no such thing as a standard price even 
for articles whose price is said to be fixed. One supplier may 
agree to deliver f.o.b. destination while another quotes f.o.b. 
shipping point only. Discounts are offered for prompt pay- 
ment and rebates are offered on total business. Yet producers 
have long attempted to maintain a standard resale price for 
trade-marked articles whose reputation and good-will have 



336 PROCUREMENT BY PURCHASE 

been developed by great effort, often by the expenditure of 
large sums for advertising. It has been claimed that the same 
article without its familiar label has occasionally been sold 
at a lower price than is demanded for the product under its 
trade-name. In buying an advertised article there is a certain 
protection for the purchaser, notwithstanding a possible higher 
price, one advantage being that the producer does not as a 
rule demur to the return of damaged or defective goods. On 
the other hand, the prices of highly advertised articles must 
bear the burden of their exploitation and usually a higher 
percentage of profit. The producer of such a commodity, 
especially if it is patented, is in a position to maintain his price. 
He may refuse to sell in bulk and he usually is reluctant to 
make price concessions. Price maintenance constitutes an in- 
creasingly important factor in the marketing of advertised 
goods to which the purchasing agent must give due con- 
sideration. 

It is an open question as to whether or not the benefits of 
purchasing a trade-marked article of known reliability offsets 
price considerations. The decision must be based on the claims 
for the merits of the substitute offered for the advertised article 
and the purchaser's facilities for technical inspection and test 
of those claims. 

Kinds of Price 

If price is a very important consideration, every purchase 
contract should explicitly state it. Probably more disputes and 
hard feelings between buyers and sellers arise because of dis- 
putes about this important matter than from all other causes. 
This must be guarded against. 

There are four bases on which prices may be fixed, as 
follows : 

1. A definite price based on a lot or unit. 

2. Price based on performance. 



THE PRICE 337 

3. Current price at time of delivery with or without definite 

limits. 

4. Price composed of the cost plus a percentage or amount as 

profit. 

The Definite Price 

The contract which contains a stated and definite price is 
the most usual and the most satisfactory because it is the 
simplest in form. It leaves no room for misunderstanding, 
each party knowing exactly what he will receive or give under 
the contract. It is necessary, however, to distinguish clearly 
between two kinds of stated prices; one for a stated lot of 
material, the other for a particular unit. A price consisting 
of a lump sum for a given lot deprives the purchaser of his 
right of selection; he must pay the entire amount even if he 
accepts only part of the lot, while if the price be a unit price, 
the purchaser pays only for such units as he accepts after in- 
specting the material. Usually a lump sum is specified for 
a quantity of specific material and for material which cannot 
be sold on a unit price basis, as for example, when the exact 
quantity is not known. 

Price Based on Performance 

Certain materials are sometimes bought and paid for on 
the basis of their performance in actual use. Fuel and oil are 
well-known commodities- frequently purchased on this basis. 
For instance, coal that generates a stipulated number of British 
thermal units or calories of heat per ton may be paid for at a 
certain rate, the price being scaled proportionately if it fails 
to meet these tests. Automobile tires with their guaranteed 
adjustments for mileage are another example. There is no 
good reason why this method cannot be applied to all commodi- 
ties, the merits of which cannot be easily judged in any other 
way. 



338 PROCUREMENT BY PURCHASE 

Current Prices 

In the purchase of staple commodities with a fairly settled 
and known market it is customary to contract for them on the 
basis of the current price at the time of the delivery. Such 
an arrangement is advantageous to both buyer and seller, as 
it guarantees the delivery and sale of certain material, allowing 
both parties to make plans for the future with assurance. In 
the case of materials the price of which can be easily deter- 
mined by the m.arket quotations, this plan is very popular. A 
common method is to use the average daily price quotations 
for the month as the basis of payment for all material delivered 
during that month. Such arrangements may be extended over 
a long time, the parties to the contract sometimes protecting 
themselves by fixing the limits above and below which the price 
shall not go. Thus in the purchase of cotton a maximum 
and minimum limit of 20 and 16 cents may be fixed. Both 
buyer and seller assume some risk, but both enjoy the benefit 
of knowing the future price on which they can finance their 
businesses during the period covered. Under this plan, the 
possibility and the effect of loss due to price fluctuations still 
exist but the entire loss possible does not fall on one party, 
being divided between them. A knowledge of the general 
market conditions and the extent of fluctuations which may 
be expected during the specified period will determine the 
wisdom of accepting a current price with or without maximum 
limits. 

The Cost-Plus Contract 

Occasionally in an unsettled market, or under unknown 
conditions of manufacture in which the seller is reluctant to 
carry the full risk of a contract of an unusual nature, an 
arrangement is entered into, known as a "cost-plus" or 
"agency" contract. Under this contract the seller agrees to do 
a certain piece of special work for the buyer in return for the 



THE PRICE 339 

reimbursement of the actual cost plus a certain per cent thereof 
or a certain amount as his commission or profit for doing 
the work. 

Under this plan many variations are possible. A clause 
may be inserted in the contract setting the maximum cost and 
the latest delivery date. If market conditions keep the actual 
cost below the stipulated maximum, the seller may receive a 
part of the difference between the actual and the estimated 
costs. If, on the other hand, cost exceeds the maximum, the 
profit to the seller may be cut. The possible variations in the 
price stipulations of such a contract are unlimited. Many of the 
large contracts placed by the government during the war for 
ships, cantonments, arms, clothing, and munitions, were "cost 
plus io%" as profit to the supplier. Contracts for small items 
such as tools, patterns, and experimental work are frequently 
made on the basis of a certain rate per hour for all work on 
the contract. 

The cost-plus type of contract is obviously an accelerating 
measure, demanding that the buyer assume most of the risks, 
but it results in a saving of time at the expense of dollars. At 
times the condition of the labor and material market may make 
this the only method of getting work done. Yet the plan may 
conceivably defeat its own object. The more waste of time 
and materials in doing the work, the more it costs and the 
larger the amount represented by the profit. Such a contract 
is subject to easy manipulation and must be carefully audited. 
It is at best a dangerous arrangement and should be avoided 
whenever possible. 

List and Net Prices 

Quoted prices are either list or net. List prices are subject 
to trade discounts and the remainder is the net price. Net 
prices are subject to cash discounts or to special terms of pay- 
ments. List prices and trade discounts exist for the conven- 



340 PROCUREMENT BY PURCHASE 

ience of the seller. By adjusting his discounts he can avoid 
making changes in the prices printed in his catalogue each 
time market prices fluctuate, or he can conceal the variable net 
prices he quotes to different buyers by differences in the trade 
discount offered to them. Thus the list or catalogue price 
remains the same and only the discount is varied. Large 
buyers usually receive a larger discount than smaller buyers. 

As a rule trade discounts are built up by classes, all buyers 
in each class receiving a certain trade discount. Thus there 
may be a group of class B buyers who receive a small discount, 
a class C receiving a larger discount, and so on to the extent 
that the classification is established by the seller. Whenever 
a seller decides to change his price after he has issued a cata- 
logue, it is only necessary for him to send out a price list, 
using the number or symbol of the particular article or class 
to designate the new discount on that particular class of goods. 
For instance, a certain line of hardware may carry a discount 
of 25% but due to a rising cost of production the vendor may 
cut the class A discount from 25% to 15%. In such a case 
it is only necessary for him to advise the trade of the change 
of discount by forwarding a notice to this effect. 

A purchasing agent should try to discover such cases of 
varying discounts. They are generally used in quoting cata- 
logued articles. When a seller quotes but one discount, as 
above, a varying discount is much harder to recognize than 
when a series of discounts are offered, as 40% and 10%. 
This series generally indicates that the seller quotes varying 
discounts to different customers. 

Transportation Charges 

There has been considerable discussion as to whether a 
transportation charge is a part of a material's cost or a general 
item of expense. The former opinion is to be preferred. To 
see how this works out the discussion of price maintenance 



THE PRICE 341 

shows how a supplier selHng trade-marked material at a cer- 
tain fixed price is at liberty to vary the price by allowing the 
buyer the freight charges from shipping point to destination, 
where as his competitor does not offer that inducement. 

F.o.b. Destination 

In arranging for the delivery of material, the purchasing 
agent should, whenever possible, stipulate that it be made 
f.o.b. destination, first, to decrease the cost of the material; 
secondly, that the vendor may be responsible for all negotia- 
tions with the transportation company, including any claim 
for damage in transit or for overcharge; and thirdly, that 
formal delivery will not be made until the day the material is 
received at destination, thus allowing ample opportunity for 
inspection before payment is due. If impossible to secure 
quotations f.o.b. destination, the buyer should always endeavor 
to have the material shipped freight prepaid, thereby relieving 
himself of the clerical details in connection with the charges 
and adjusting any matters with the carrier. It has been held 
that the party who pays the transportation charge is responsible 
for the recovery from the transportation company of any 
claim for overcharge or damage; therefore, if freight is pre- 
paid, all responsibility rests with the seller. 

As a rule the purchasing agent experiences little difficulty 
in obtaining an f.o.b. destination shipment and few concerns 
refuse their customers this accommodation. The "request for 
quotation" illustrated in Form 72 shows the f.o.b. delivery 
point to be New York which is the location of the buyer. In 
one instance this method of having the delivery point printed 
on the request for quotations resulted in over 90% of the 
bids received being on the basis of f.o.b. destination, practically 
without any increases in the prices asked f.o.b. shipping point 
and practically without any increases above the transportation 
cost. 



342 PROCUREMENT BY PURCHASE 

Discounts for Prompt Payments 

The method of payment is an important feature of a price 
and one which often permits the careful purchasing agent to 
save his concern considerable money. As a general rule it is 
possible to secure a reduction of the net price in the form of 
a discount for cash within a certain length of time from the 
delivery time. In this he must co-operate with the finance 
department, for it is sometimes possible to juggle trade and 
net discounts quoted to suit the finances of the business. Con- 
trary to general belief and practice, the credit period allowed 
for payments begins upon the day of delivery, wherever and 
whenever that may be. If material is quoted f.o.b. shipping 
point, 30 days net, the bill is due 30 days from the day of ship- 
ment; if quoted f.o.b. destination, the bill is due 30 days from 
arrival. Purchasing agents are more and more demanding 
that sellers observe this rule before requesting payment. 

Cash discounts have been the subject of attack from many 
quarters and movements have been introduced for their elimi- 
nation Though there is much difference of opinion as to the 
value of their use, it is often contended that it would be best 
for all parties concerned if they were abolished. Then the 
price quoted would be the net price, and the price of an article 
with a supposedly fixed value would be more truly fixed. To 
effect the abolition of cash discounts, however, would require 
the standardizing of the time of payment for all buyers and 
all orders would have to be either cash payable on delivery or 
within 30 days or on some agreed basis. 

In practically every line of trade there is an established 
custom relative to the time and terms of payment. However, 
these accepted terms are varied according to the wish of 
the vendor and are subject to negotiation between buyer 
and seller. For instance, a buyer making a contract covering a 
long period of time which totals a considerable amount, may 
reasonably request a substantial discount for cash on delivery 



THE PRICE 343 

and lesser discounts on time payments — the discount varying 
with the credit period. In such cases he may obtain either a 
5% discount for cash, or 2% for 10 days, or 1% for 30 days. 

The saving made by taking advantage of the cash discount 
varies with the rate of the discount and the period of time 
during which it runs. In some instances it may be more 
profitable to disregard it. Assume, for instance, two trans- 
actions offering 1% discount for payment in 10 days from 
delivery, but one at 30 days net and the other at 90 days net. 
Assume also that the ruling price of money is 6%. It would 
pay a buyer to accept the discount on the 30-day net period 
but not that of the 90-day period. Accepting a discount on 
the first he would be gaining 18% per annum on the money in- 
volved, against only 4^^% on the second. The second should 
be paid at the end of the 90 days even though the firm's custom 
is to discount all bills. 

Whether discounts are taken or not usually depends on 
the financial condition of the business. Every large contract 
should be made with an understanding of the probable supply 
of ready cash at the time the purchase is to be paid. If the 
immediate resources of a concern are low, the purchasing 
agent tries to secure longer credit period in return for waiving 
the discount. If the bill remains unpaid at the end of the net 
credit period, and the seller draws on the buyer for the amount 
of the bill, the draft should be promptly met. On the other 
hand, a vendor may be willing to increase the cash discount 
if the net period is shortened. If his concern has plenty of 
ready cash, the purchasing agent, as a matter of policy, asks 
for discount concessions and expects them. 

Trade Acceptances 

An old method of payment, but little used up to recent 
years, is the trade acceptance which in the last few years has 
been coming into more general use in the American market. A 



344 



PROCUREMENT BY PURCHASE 



trade acceptance may be defined as a bill of exchange drawn 
upon the buyer by the seller and accepted by the buyer upon 
the delivery of the goods. It is similar in tenor to a draft but 
differs from it in that a draft is not usually drawn until after 



No.. 



STo; 



_192 



I Thirk/) 

I Sixt:«. Vdays after^ pay to the order of OURSELVES 

H. Ninegjt |sight 

I [l Dollars . 



Idate 
|sight 



The obligation ot-^he aoeeptor hex«of arlaefl out of the poTCblM of goodj from the dnwer. 



No. 



192 



_after_ 



_pay to the order of 



-Dollars. 



'The obii^tion of^ t^e loceptor hereof tilBes out of tnc porchaie of coodi from the dnvcr. 



5To: 



Form 73. Trade Acceptance Forms 
Prepared by Federal Reserve Bank of Cleveland, Ohio 

the transaction has been carried out and usually after the 
credit period has passed; a draft, furthermore, may be given 
in return for other considerations than in payment for goods. 
The trade acceptance, as illustrated in Form 73, is usually 
filled in and sent by the vendor with the invoice. The purchaser 
is expected to sign it (technically known as accepting it), and 



THE PRICE 345 

return it to the vendor as soon as the delivery has been ap- 
proved. The acceptance constitutes an agreement on the 
part of the buyer to make payment on a stated date for the 
material. He gives up the option under his former method 
of a time period for deciding whether to take a discount for 
prompt payment or a net payment at the end of the credit 
period. In case he fails to pay the acceptance on the date on 
which due, as the document is sent through his bank for collec- 
tion, it becomes a tangible record before the commercial world 
that he has failed to meet an acknowledged obligation. Under 
the old method, if he failed to pay his account on the due date, 
such failure would ordinarily constitute nothing more than a 
private issue between himself and the seller. His credit rating 
in the general commercial world would not thereby suffer 
greatly. 

The advantages derived by the buyer from the use of the 
trade acceptance are thus described in a bulletin issued by the 
Irving National Bank of New York City: 

(a) It develops careful buying. 

(b) It enables him to keep better track of his outstanding obli- 

gations, thereby avoiding the evils of overextension. 

(c) It strengthens his credit and puts him in the position of 

a preferred buyer. 

(d) It develops in him the habit of prompt payment and 

furnishes him w^ith an excellent excuse for requiring 
prompt payment from his customers. 
(e) It enables him to realize that credit is as tangible as cash 
and should be guarded and used accordingly, 

(f) It eliminates wastage and lost motion attending the open 

book account method. 

(g) It is good business because it releases business capital 

for new transactions. 

(h) It improves the chances of the buyer of small means to 
operate in successful competition with the large buyer. 

(i) It helps the buyer by making him deal always in current 
transactions rather than in long-drawn-out book ac- 
counts. 



346 PROCUREMENT BY PURCHASE 

(j) As the buyer often becomes a seller, the same advantages 
that apply to the seller apply to him. 

(k) It serves as a tonic to the business organizations con- 
cerned. 

(1) It prevents the accumulation of overdue accounts. 

(m) It develops a sounder and more serious attitude toward 
the buyer's own obligations. 

The advantages to the seller of goods are thus enumerated : 

(a) It relieves him from the burden of financing his customers 

and the consequent burdening of his own capital. 

(b) It enables him to conduct business on a more systematic 

basis, with a more regular income schedule. 

(c) It puts the burden of providing correctness of the details 

of the merchandise transaction where it belongs — upon 
the buyer. 

Until trade acceptances come into more general use in 
American business, sellers must continue to offer special induce- 
ments and discounts to encourage buyers to use this method of 
payment. A signed trade acceptance is in effect a note payable, 
by which an account payable is turned into a negotiable instru- 
ment and a more easily proven and collectible liability. 



CHAPTER XXV 

THE WRITTEN CONTRACT 

Kinds of Contracts 

The purchase contract agreement should always be in writ- 
ing if the almost inevitable misunderstandings and dissatisfac- 
tion are to be avoided that are the inevitable results of a verbal 
arrangement. Verbal agreements and orders are too easily 
forgotten to be risked. The legal phases of contracts are 
discussed in Chapter XXVIII. 

There are two generally recognized forms of purchase 
contracts : 

1. A special, single purchase order contract covering a par- 

ticular purchase usually for a small quantity and originat- 
ing from a purchase requisition. 

2. A blanket contract which covers a large quantity usually of 

raw materials or supplies with the delivery date indefinite. 

Single-order contracts are generally left to the discretion 
of the purchasing agent, his decision as to price, vendor, and 
so on being final and based on his independent judgment. A 
blanket contract is invariably placed only after a most careful 
survey of all the data available has resulted in its approval by 
the management. In either form of contract, however, the 
same principles operate in the matter of price and the same 
needs must be kept in mind. 

Blanket Contracts 

Every purchasing agent has ample opportunity to show his 
good business judgment in developing blanket contracts, for 

347 



348 PROCUREMENT BY PURCHASE 

the success of many businesses depends upon the wisdom with 
which such contracts are made. Although in some Hues of 
business and types of manufacture blanket contracts cover 
from 50% to 90% of the total purchase requirements, very 
few businesses have exhausted the possibilities for saving 
through these contracts which practically always bring many 
advantages in price and delivery impossible to obtain by using 
the casual inquiry for price and delivery as the particular need 
for a material arises. In placing such contracts the state of 
the market must be carefully gauged and studied by the pur- 
chasing agent acting as the expert appraiser of raw material 
values. The terms of blanket contracts practically always are 
very definite as to price but seldom include more definite stipu- 
lations regarding shipments and delivery dates than a clause to 
the effect that "shipments are to be approximately so many 
units per month," or that "the total contracted quantity is to 
be taken within so many months or years," or some similar 
statement of quantity and deliveries. Frequently they cover a 
variety of materials instead of one. Their possibilities are so 
varied that the purchasing agent's cleverness will be tested in 
arranging stipulations exactly in accordance with his needs and 
in seeing that the wording of the contract clearly defines what 
he intends. 

The Individual Purchase Order 

After a blanket contract has been placed, the directions 
regarding deliveries are usually given by means of individual 
purchase orders (Form 74). The terms and conditions are 
those previously determined, with directions to ship a certain 
quantity and the stipulation of a definite delivery date. This 
form is also used for placing a single contract following the 
receipt of a purchase requisition and the securing of bids. 
These orders are alike except that the first class will refer to 
the blanket contract to which it applies. 



THE WRITTEN CONTRACT 349 

Every purchase order should include the following : 

1. Name of the vendor to whom the order is given. 

2. The description of the goods desired. 

3. The quantity and units of goods wanted. 

4. The price to be paid, including terms, etc. 

5. When delivery is to be made. 

6. Shipping directions. 

7. Any special identification marks for packages, such as the 

purchase order number. 

8. Any special conditions or references not written out in de- 

tail in the order. 

9. The signature of the purchaser. 

The matters enumerated above have been discussed in 
detail in the preceding chapters with the exception of one 
important consideration — the time of delivery. 

Fixing the Date of Delivery 

The importance of a definite delivery date, especially in 
the purchase of materials required for manufacturing, cannot 
be overestimated, and the careful purchasing agent will specify 
in his order the date wanted. The purchase requisition from 
which his negotiations originate, should state — and he must 
insist that it does state — a definite date when the material is 
required. Any requisition which lacks that information should 
be returned for completion. The setting of the delivery date 
is of great importance. A too early delivery means needless 
expense; a delayed delivery may mean disaster. Raw 
material in storage, while waiting to be used, represents so 
much increased burden for the idle time before actual work 
upon it begins and it may be subject to deterioration. The 
buyer will, therefore, approximate as closely as he dares to the 
latest possible date for delivery but he will always err on the 
side of safety, and regardless of other considerations he will 
see that delivery is on time. 



350 PROCUREMENT BY PURCHASE 

Difficulty of Effecting Prompt Delivery 

If the mere placing of the purchase order insured the receipt 
of the article desired, buying would be so simplified as to 
become almost automatic. With every precaution, however, 
delays are likely to arise, many of them beyond the buyer's 
control. It is his task to reduce such contingencies to the 
minimum by taking certain routine precautions. 

The purchasing agent who buys only on a price basis may 
lose all the advantages of price economy and greatly increase 
the final purchase figure by placing his order with unreliable 
concerns. He soon learns that concerns which offer the most 
attractive prices are, as a general rule, unable to offer equally 
attractive service. Though the most reliable supplier may fail 
occasionally to deliver on the date promised, such failure is 
accidental; whereas poor delivery service is frequent with the 
supplier whose quotations have been accepted on the basis of 
price alone. 

As previously stated, a supplier's record as to delivery serv- 
ice should be noted on the vendor's reliability record (Form 69, 
page 326) for future reference in estimating the relative value 
of the service to be expected. 

Advance Information of Factory Requirements 

As the efficiency of the purchasing department depends 
largely upon fulfilling the needs of the factory, it should keep 
in close touch with the production departments' requirements. 
It is not its province to question the accuracy of the date on 
which the material is required as stated in the purchase order 
requisition, and this date must be accepted in good faith. 
Though it is assumed that the purchasing department will be 
reasonably efficient, that it will place the order without delay 
and that it will expedite delivery, the requisitioner should make 
a reasonable allowance for the purchase routine and for possible 
accidents and delays, and he should not expect the perform- 



THE WRITTEN CONTRACT 35 1 

ance of the impossible. It is sometimes not the least difficult 
of the purchasing agent's tasks to obtain such co-operation, but 
obtain it he must. 

It is incumbent on the buyer to keep the department heads 
posted on all changes that affect deliveries of the major ma- 
terials they use. It is their part to anticipate their needs and 
to give him a tentative estimate of their most important require- 
ments before filing their requisitions. Haste in purchasing is 
disastrous to all parties concerned. Only by close co-operation 
can it be avoided. The far-seeing purchasing agent, however, 
gauges the situation in advance. If he is uninformed he takes 
measures to inform himself. In the last analysis, when delays 
occur, however legitimate may be his excuses, he will be called 
upon to bear more than his share of the blame. 

When the purchasing agent has obtained an authentic date 
on which the materials are required, this date appears on the 
purchase order itself and the vendor should be closely held to 
his bargain to meet it. If the consuming departments are 
habitually honest and careful in estimating their future require- 
ments, if the time allowed for delivery has been reasonably 
determined, and if the vendor has discovered from his past 
experiences with the purchasing department that its demands 
are sincere and will be insisted upon, delivery on time is rea- 
sonably certain. Conversely, laxity or insincerity in time 
stipulations inevitably means delays. 

Allowance for Time in Transit 

If the vendor is to deliver the goods ready for use at a point 
other than destination, the time required to complete shipment 
must be taken into consideration, and in setting the delivery 
date, allowance must be made for the period the goods are in 
transit. 

The purchase order illustrated in Form 74 states that the 
vendor is to "ship to arrive New York on " This 



352 PROCUREMENT BY PURCHASE 

Statement throws on the vendor the responsibiUty of shipping 
early enough to allow for transportation difficulties or delays 
that can be foreseen. The arrival date may be and sometimes 
preferably is stated, not as a single date, but as a period defined 

as "to arrive between and " The vendor 

has the privilege of shipping at any time he chooses so long 
as the material arrives within the stated limits. 

The law states that if payment is to be made on delivery, 
the delivery should be made before sunset in order to give the 
buyer a chance to examine the goods. If an article contracted 
for is lost or destroyed in transit, it is considered — unless 
otherwise provided for — that delivery occurred with its dis- 
patch and the loss is the buyer's. The parties are considered 
to have realized that such a thing may happen and are supposed 
to act accordingly. On the dispatch of the goods the contract 
is legally discharged. 

Time for Completion 

If no time for performance is stated, every contract is 
supposed to be performed within a reasonable time. The 
exact delivery time should be stated in the contract, otherwise 
it will be considered as of no effect if a long period goes by 
without anything being done by either party. Many contracts 
have a clause providing that the contract must be completed 
before a certain date. Should this date pass before completion, 
the contract invalidates itself. When a performance becomes 
impossible by what is known as an "act of God," such as a 
tornado, a hurricane, a flood, a conflagration, or some other 
unforeseeable accident, the contract is considered as discharged. 
War discharges all unperformed contracts between citizens of 
enemy countries. If any of the terms of the contract have 
already been fulfilled by either party, the contract will merely 
be suspended until the war is over, when it must be carried out 
in accordance with its terms. 



THE WRITTEN CONTRACT 353 

A contract may provide for its own discharge on the hap- 
pening of a certain event. It is common to insert provision 
against strikes and similar happenings, but such clauses must 
be in the body of the contract if it is to hold. A notice at 
the top of the firm letterhead that all sales are subject to strikes 
or accidents, would not form part of a contract, written on the 
letterhead. 

The Copies of the Purchase Order 

Having selected an article, provided for its delivery, deter- 
mined the price, and arranged satisfactory terms of payment, 
the formal purchase order (Form 74) is sent to the vendor for 
his acceptance. 

As many as six copies of this order may be made out to 
serve different purposes and functions distinguished by their 
colors, as follows : 



^0. 


Color 


Destination 


I 


White 


To vendor — the contract proper. 


2 


Pink 


For purchasing department serial 
file. 


3 


Gray 


To receiving division for identify- 
ing shipments. 


4 


Yellow 


To accounting division, thence to 
auditor. 


S 


Brown 


To originator of request for the 
material. 


6 


White 


To purchasing department follow-up 




(cardboard) 


file. 



As a rule the purchase forms are numbered serially in ad- 
vance, to prevent their loss and for purposes of identification. 
The body and outline of all copies are alike — various changes 
and additions being made to permit the copies to serve different 
purposes. A small concern does not need so many copies, 
requiring only copies numbered i, 3, 5, and 6. The data to be 
typed on the order are all taken from the requisition, the 
handling of which has been described previously. The purposes 



354 



PROCUREMENT BY PURCHASE 



ORIGINATOR OF 

REQUEST FOR 

MATERIAL 



REQUfSITION NO. 



THE BUYING COMPANY 



(copy 1) 



NEW YORK, N.Y. 



This number must appear 
on all invoices and packages 

N9 35353 



PLEASE FURNISH US WITH THE FOLLOWING MATERIAL IN ACCORDANCE 
WITH YOUR QUOTATION OF 



UNIT AND DESCRIPTION OF MATERIAL WANTED 



Return Acceptance Card Promptly, giving 
Complete Shipping Information. 



TO ARRIVE NEW YORK, f 



1. All packages must be marked with the order number given above. 

2. Invoices and shipping receipts must bear this onder number. Mail them on day of shipment. 

3. Each shipment must be covered by a separate invoice. Articles on this order must not 

be billed with those on other orders. 

4. The right is reserved to cancel this order if not Tilled yyithin the contract time. 

5. The conditions stated in this order shall not be modified t7 any verbal understanding or 

agreement. 

6. Charges for boxing and carting «!ll not be allowed unless previously arranged. 

7. If price is not stated on this order, the material must not be billed at a higher price than 

last paid without notifying us in advance. 

8. The acceptance of this order includes all terms, prices, delivery, specifications, and 

conditions stated herein. 

THE BUYING COMPANY 



Form 74 (a). Purchase Order (copy i). (Size 83^ x ii. 
(See page 357 for description of copies) 



THE WRITTEN CONTRACT 



355 



ORI6INATOR Of 

REOUE&T FOR 

MATERIAL 



(COPY 2) 

PURCHASE ORDER COPY FOR 

PURCHASING DEPT'S 
MASTER SERIAL FILE 

N9 35353 



TERMS 
SHIP VIA 



TO ARRIVE NEW YORK, I 



ORIOINATOR OP 

REQUEST FOR 

MATERIAL 



(copy 3) 
purchase order copy for 
RECEIVING DIVISION 



N9 35353 



TERMS 

SHIP VIA 



TO ARRIVE NEW YORK, N.Y., ON 



DE&CRIPTION OF ARtlCLE 



ORIGINATOR OF 

REQUEST FOR 

MATERIAL 



(copy 4) 
purchase order copy for 
ACCOUNTING DEPT. 
AND AUDITING DEPT. 

N? 35353 



TO ARRIVE NEW YORK, 



Form 74 (b). Purchase Order (copies 2 to 4) 
In copy 3, column "List Price and Trade Discounts" is eliminated. 



356 



PROCUREMENT BY PURCHASE 



THIS COPY FOR 

ORIGINATOR Cr 

REQUEST FOR 

MATERIAL 


(COPY 5) 

PURCHASE ORDER COPY FOR 

ORIGINATOR 

TO ,92 N9 35353 


I 1 1 — ■ ■ '^^^ZIZ^ — ■ — 1 


TERMS FO.O. 

SHIP VIA TO ARRIVE HEW YORK, HT. ON 


DATE 


aoAVTmr 

RECEIVED 


BALANCE 
DUE 


DATE 


QUANTITY 
RECEIVED 


BALANCE 
DUE 


To Originator: 

Should you desire information about this order, please 
call the Purchasing Oept. as followit 

About Specifications, change of order-Call Planning Division 
Quotations Preparation " 
Dealer Production " 
Delivery date Scheduling " 
Inspection, Claims, Invoices Inspection " 


































































































^ 

























Form 74 (c) Purchase Order (copy 5) 



1 


2 


3 


4 


5 


6 


7 


8 


9 


10 


II 


12 


13 


14 


15 


16 


17 


18 


19 


20 


21 


22 


23 


24 


25 


26 


27 


28 


29 


30 


31 


M 






















PURCHASING DEPARTMCHT'3 f COPY 6) 

FOLLOW-UP FILE ^ 

N9 35353 



■^~~— ^' 


■ 1 ■ 






" 





- 1 ^ 


TERMS F.O.B. 

SHIP VI A TO ARRIVE NEW VORK. N.V., ON 


ITEM 


ITEM 


Acknowledged 


Pronnised 


Kll of lading}'"'* 


Invoice Number 


Acknowledged 


promised 


Hotic« of Shipment: 
B^iltffuxi.njl*''*' 


Invoice Number 


Urged 


Promised 


s;;su°^^- 


Invoice Amount 


Uryed 


Promised 


Pert of )o^,r 


Invoice Amount 


Urged 


Promised 


Date Mat! Rec'd. 


Copy of Material 
litcci^vd ^cet 


Urg-ed 


Promised 


Date Mat! Rtc'd 


Cow of Materral 
RcuivBl Sheet 


Urped 


Promised 


Mat'l. Accepted 


Balance Due 
On Order 


Urged 


Promised 


Mat'l. Accepted 


Balance Due 
On Order 





Form 74 (d). Purchase Order (copy 6) 

Copy 6 is on card stock. Reverse side of this copy is a continuation of the items shown 
below on this form ; also at tap of reverse side numbers are given in reverse order, reading 

from right to left- 



THE WRITTEN CONTRACT 357 

served by the various copies of the purchase order are as 
follows : 

Copy I — the original — is perforated along the left margin 
in order that the requisitioner's name and any other data not 
pertinent information for the supplier may be entered on the 
margin and separated from the order proper before it is mailed. 
The order must include all conditions governing the perform- 
ance of the order. Conditions of delivery, packing, and ship- 
ment which are imperative may be printed, for emphasis' sake, 
in red ink. The other conditions on which the purchaser may 
insist if occasion arises, and to which the vendor subscribes 
as well as to the typewritten terms, prices, delivery rules, and 
specifications, appear in black ink. The original, when signed 
by the purchasing agent or his authorized representative and 
when checked for completeness and accuracy, is sent to the 
vendor together with the acceptance card shown in Form 76. 

Copies 2 and 4 contain the same data as the original, except 
that the conditions involved in the transaction do not appear. 
On copy 3, the column showing the price and trade discount is 
obliterated in order that such confidential data may not be 
divulged to the receiving department which is not concerned 
with it. At the foot of copy 3 appear columns in which the 
receipt of the material may be indicated. At the foot of copy 5 
provision is made for the notation of any balance due. On 
copy 6, placed in the follow-up file, provision is made for re- 
cording the receipt of material on partial shipments, to the end 
that the follow-up clerk may know the status of any given 
order at any time. 

Inspection of Purchase Order 

As an error or omission may alter the character of the 
entire contract and result in a disastrous transaction, before the 
purchase order leaves the purchasing department it should 
receive a rigid inspection with a view to determining that it is 



358 PROCUREMENT BY PURCHASE 

correct in every essential. No purchase order may be con- 
sidered as complete until it carries the correct date, the exact 
name and address of the vendor, the proper quantity of material 
required, the definition and specification which coincide with 
that standardization by the firm, the time and place of delivery, 
the price — either a lump sum price or a price per unit — the 
time of payment, and the method of payment. If a printed 
specification of the materials be attached to the purchase order, 
only a definite reference to it will make it a part of the contract. 
Since the purchase order is the authorization to disburse money, 
the importance of each of these items is self-evident. 

Should any changes be made in the original order, such as 
its cancellation or the revision of its terms, a form (Form 75) 
similar to the original purchase order is made out and the 
various copies are sent to the parties concerned with the change. 
The vendor's copy is accompanied by a new acceptance card. 
When other departments are advised regarding a change in an 
order and no copy need be sent to the vendor, the original copy 
should be destroyed. 

Vendor's Acceptance of the Order 

An acceptance card, illustrated in Form 76, should be sent 
to the vendor with each purchase order, the return of which is 
an acknowledgment of its receipt and a definite acceptance of 
the contract. As will be explained in detail in Chapter XXVIII, 
"Some Legal Aspects of Purchasing," any minor deviation 
from the terms of the contract in the purchase order will in- 
validate all previous arrangements and no contract can be 
formed by merely placing an order. The acceptance card binds 
the vendor to the bargain and completes the contract. 

Another function of this card is to supply the purchaser 
with the shipping data which he will require in his follow-up 
work. It is not always expedient or possible to allow the buyer 
to specify the shipping route. While the buyer is probably 



THE WRITTEN CONTRACT 



359 



THE BUYING COMPANY 
New York, N.Y. 



THIS PURCHASE ORDER NUMBER MUST 
APPEAR ON ALL INVOICES AW PACKAGES 

NO. 



ORIGINATOR OF 

DEOUEST FOR 

MATERIAL 



REQUISITION NO. 



PLEASE MAKE THE FOLLOWING CHANGE IN OUR PURCHASE OCDER NUMBERED AS ABOVE. 
SUBJECT TO ALL THE CONOITIONS GOVERNING THE ORIGINAL ORDER. 



PLEASE ACKNOWLEDGE PROMPTLY ON THE ENCLOSEP CARD. YOUR ACCEPTANCE OF THE 
CHANGE OF THIS ORDER. 

THE BUYING COMPANY 

PORCMASINO AGENT 



Form 75. Supplementary Purchase Order. (Size Sj/^x 11.) 

Six copies. Five copies similar to first, except that recipient of copy is stated at top as in 

Fonii 74. Sixth copy is identical with first copy, but in addition contains numbers at top 

and data at bottom as on Form 74 (d)- 



360 PROCUREMENT BY PURCHASE 

more familiar with traffic conditions and possibilities near the 
point of destination the shipper may know them better at the 
point of shipment. Furthermore, the shipper has the privilege 
of routing the article to the delivery point as he pleases, so 











Date 




THE 


BUYING 


COMPANY. 








NEW YORK. N.Y. 














This 


ACKNOWLEDGES 


RECEIPT OF YOUR 


PURCHASE ORDER 


NO. 




DATED 


POP 








Wl- 


IICH WE ACCEPT. 


SHIPMENT WILL 


BE MADE ON 




VIA 










PPl» 





Form 76. Vendor's Acceptance of Order 
(Private post-card forms, self-addressed to Purchasing Department) 

long as he meets the delivery time. Again, since information 
was last available to the buyer, conditions may have changed, 
making it desirable to use a different routing. Hence the 
routing data on the purchase order can be only considered as 
suggestive. 

The purchase order is designed to include thorough routing 
directions, but this routine is only suggestive and the vendor 
may modify it to meet current traffic conditions. As a matter 
of business policy, however, the vendor may be expected to 
follow it if it is at all possible, not only for the sake of meeting 
his customer's wishes, but because he realizes that the buyer 
is usually in an equally good position to choose the best routing- 



CHAPTER XXVI 

EFFECTING THE DELIVERY 

Vendor Naturally Remiss 

The purchasing agent has the right to assume that prompt 
shipment and the effort to keep a promise of dehvery are part 
of the vendor's service for which he has contracted. Never- 
theless, he must realize that the performance of vendors, like 
that of other mortals, does not always live up to their promises. 
Therefore, he must combat their tendency to lethargy by con- 
stant reminders that he is expecting the goods by a certain 
date. This tendency is most aggravating when a seller's mar- 
ket prevails and a sales department accepts orders in excess 
of the factory's capacity to supply the goods — a policy en- 
couraged by the knowledge that the buyer is unlikely to do 
better elsewhere. The purchaser is then justified in ruthlessly 
following up the vendor until his contract is fulfilled. What- 
ever the cause of delay, he has the right to insist on delivery 
and he should spare no effort to impress the seller with the 
importance of prompt service and the disastrous effects of fail- 
ure to deliver. 

To adhere to a delivery date once fixed is very important. 
An investigation of 50 orders placed with one supplier showed 
that 80% were scheduled for delivery far in advance of 
requirements. Hence when the vendor failed to ship them on 
scheduled time, the lax follow-up man was not asked about 
the delay and he in turn failed to jog the vendor. The 
investigation showed that not one delivery was made on time 
and in most cases deliveries lagged, until at length the need 
for the materials became imperative. It was discovered that 

361 



362 PROCUREMENT BY PURCHASE 

not until the scheduled date for delivery had passed did the 
vendor begin his preparation for the manufacture of some of 
the articles to be supplied. This incident illustrates what not 
infrequently happens when the purchasing department fails 
habitually to insist on delivery by the promised date whether 
the goods are needed or not. 

Follow-Up Work 

To hold the vendor to his promises is one of the most 
important duties of the purchasing department. The clerk to 
whom is assigned the task of following him up must be tact- 
ful as well as persistent. Necessary as the work is, it involves 
the possibility of so antagonizing the vendor as to make him 
indifferent to the service he gives. It is reasonable to assume 
that the seller is just as interested in securing and holding 
customers as is the purchasing department in obtaining the 
goods ordered. It is easy for the follow-up clerk to effect his 
purpose by means of form letters devised and standardized to 
cover practically all orders. The use of such forms obviates 
the personal note that may cause irritation, thereby producing 
an effect opposite to the one desired. 

When and how frequently this routine follow-up work 
should be undertaken is a matter to be determined by circum- 
stances. Ordinarily the majority of orders placed are for stock 
material ready for shipment almost immediately upon receipt 
of an order. For such purchase orders a follow-up is prac- 
tically unnecessary, unless the time for delivery is short, the 
matter important, or the vendor unreliable. Orders for special 
material are in a class by themselves and need more individual 
attention. Anything from a week to several months may be 
required for their production and accordingly they need a 
systematic follow-up. 

The follow-up work is clearly indicated by the forms 
employed. Form ']'j is a return postcard on which the supplier 



EFFECTING THE DELIVERY 



363 



Our Purchase. 
Order No. 



Your Order No. 

Acknowledged 

Delivery Promised- 



The above purchase order calls for. 



Please advise us at once on reply portion of this 

CARD, AS TO whether DELIVERY WILL BE MADE AS PROMISED: IF NOT, 
WHY NOT AND ON WHAT DATE WILL YOU DELIVER? 



Date. 



THE BUYING COMPANY 
Purchasing Division 



POST CARD 



THE BUYING COMPANY, 
NEW YORK, 
N.Y. 

PURCHASING DEPARTMENT 
SCHEDULING DIVISION 



Place 
1-cent 
stamp 

here 



Form 77 (a). Post-Card for Routine Follow- Up of Delivery 
(Private post-card together with return card — Form 77 (b).) 



364 



PROCUREMENT BY PURCHASE 



REPLY ON AND RETURN THIS PART OF CARD 



To THE BUYING COMPANY, 

NEW YORK, N.Y. 



Your Purchase Order No.. 



CALLING FOR. 



,WILL BE 



SHIPPED ABOUT- 



-FOR DELIVERY ON. 



Date. 



Per. 



-Shipper 



POST CARD 



Place 
1-cent 
stamp 

here 



Form 77 (b). Post-Card for Routine Follow-Up of Delivery (continued) 



COMPLETION OF THE PURCHASE CONTRACT 



381 



flag is then detached and forwarded to the accounting depart- 
ment, where it is filed first in a tickler file, according to dis- 



Na 775971 



NO. 77597 



DISCOUNT DATE . 



. PASSED Ra. 



DISCOUNT DATE . 
INVOICE DATE 



TERMS- 
F.O.B. 



PURCHASING DEPT.. 
VENDOR 



DUALITY 

APPROVED 
FOB PAVMENT- 



AMOUNT OF INVOICE 



RuacM. aob^t" 



TRANSPORTATION . 



DEDUCTIONS: CASH DISCOUNT S. 

TRANSPOOTATION CHARGES S- 

REJECTEO MATERIA! 4_ 



REJECTED MATERIAL . 



VOUCHER NO. 



BALANCE BV CASH. 
VOUCHER NO. ___ 



.CHECK NO. . 



Form 81 (a). Invoice Flag for Entry of Checking 

count date, and later, when paid, according to serial number, 
thus serving as an invoice register. 



INVOICE 
•..1 .M«SO 

RECEIVIMC 


DATE PUBCHASE 


QUAKJTITY A 






TERMS OF 






1 


APPROVED FOR ( 
DISTRIBUTION 


H 








FRFIGHT4 FTC. 


ENTERED 


ENTERED 





Form 81 (b). Invoice Rubber- 
Stamp to Replace Flag 

As the invoice is checked the fact should be entered on the 
stub of the flag, which provides ample space for checking data 



382 PROCUREMENT BY PURCHASE 

and for the notation by the purchasing and accounting depart- 
ments of all deductions to be made before payment. More- 
over, as it remains attached to the invoice after payment, there 
is always available a complete record of the amount deducted 
and the net amount paid. Sometimes these data are recorded 
by rubber-stamping either the face of the invoice if space 
permits or else the back, with a form illustrated in Form 
8 lb. When the number of invoices is large, the entry of data 
on the back makes them difficult to handle for ready reference. 
The flag is the better device. 

After an invoice has been flagged it should be compared 
with the purchase order in the follow-up file and the invoice 
recorded on the order in the space reserved for the purpose. 
The object of this entry is to furnish the follow-up clerk 
with the information he requires and to avoid paying an invoice 
a second time. While such a duplicate payment at first seems 
unlikely to happen where the clerical work is done systematic- 
ally, it is of comparatively frequent occurrence in every 
organization that fails specifically to provide against it. Many 
vendors regularly present their bills in duplicate as a con- 
venience to the buyer, for checking purposes, or the material 
contracted for may be shipped in two lots, and an invoice be 
rendered for the entire quantity with each shipment. Whatever 
the cause of duplicate payments, there is always a possibility 
of their occurrence, especially when an invoice is handled in 
several departments before final payment. The purpose of 
noting the invoice number upon its corresponding purchase 
order is to draw attention to the fact that the invoice covering 
that order has been received and thus a duplication is im- 
mediately noticed. 

Checking the Invoice 

In all properly organized procedures the checking of in- 
voices follows a definite and standard route, so planned as to 



COMPLETION OF THE PURCHASE CONTRACT 383 

avoid all unnecessary work and effort but flexible enough to 
obviate the complete stopping of the checking because of a 
discrepancy or on account of any other circumstance. Further- 
more, it must be very carefully performed. Even in most 
concerns considered as being efficient, this procedure is one 
affording opportunities for stopping very heavy losses of 
money. As each step of the checking is verified, the proper 
spaces on the flag should be initialed. 

As soon as the follow-up entry is made, the invoice and 
the purchase order copy should be given to the clerk responsi- 
ble for checking price and quantity shipped. When completed, 
the purchase order will be returned to be refiled in its proper 
place to prevent its being held too long for checking because of 
delay in receiving the material. 

The work of checking the price, f.o.b. point, terms, etc., 
as stated on the invoice, consists of comparing each entry on 
the invoice with the corresponding entry on the purchase order 
and making certain that they agree. Each item that does agree 
should be proved correct by the checker before initialing the 
flag. Invoices covering emergency orders placed before a price 
was determined must be checked more carefully than those on 
which the price is quoted. They usually will require considera- 
ble time and investigation. For these, the checker should have 
available current price lists and records of past prices for the 
material from which he should be able to determine whether 
or not the price quoted is reasonable. Many prices will be 
higher than those previously paid, but if he knows the trend 
of the market for that class of material, he will have little dif- 
ficulty in deciding whether or not to approve the price billed. 

Trade discounts and the terms on which the payment is to 
be made should be very carefully noted. Trade acceptances 
received with invoices should remain attached until they reach 
the accounting department, with which rests the decision as to 
when and how the account is to be paid. The purchasing 



384 PROCUREMENT BY PURCHASE 

department need feel no further responsibility. The next step 
is to check the invoice extensions with calculating machines. 
This clerk must be familiar with the proper interpretations of 
trade discounts. 

Checking the Transportation Charges 

The f.o.b. point of the shipment should be checked next. 
This part of the contract obligation can be hidden in so many 
ways that it requires most careful checking. The vendor may 
prepay the charges and then add them to the invoice. The 
buyer may be expected to pay them and to deduct them from 
the invoice amount. A careful examination of all transporta- 
tion bills should be made to ascertain which charges, if any, 
apply thereto. As transportation bills must be paid within 
twenty-four hours after delivery, practically always they are on 
hand by the time the clerk is ready to check the invoice. 

When submitting bills, the transportation agency presents 
a statement summarizing the individual items making up the 
total. Each amount is supported by a detailed slip showing 
source of shipment, weight, rate, etc., and how the amount is 
made up. These bills should be checked by the traffic depart- 
ment as carefully as the vendor's invoice, making certain that 
the classification of the material, the rate, and the extension are 
correct. Discrepancies should of course be adjusted with the 
transportation agency. 

The bills and statements, after checking, are forwarded to 
the purchasing department. Here they are entered on the 
appropriate purchase order copy in the follow-up file so as to 
have all data relating to the invoice assembled in the same place 
and ready for checking. Each bill is also rubber-stamped, 
noting thereon the stores ledger account to be charged with 
its amount — the same account as for the material transported. 
If any of the bills are to be paid by the vendor, they are 
marked to be charged to a "Freight to be Deducted" account. 



COMPLETION OP THE PURCHASE CONTRACT 385 

The bills are then forwarded to the accounting department for 
vouchering in the same way as described later for vendors' in- 
voices. 

The checker is now ready to check the transportation charges. 
If transportation was prepaid and is included in the invoice, 
it should be counted as part of the charge if the shipment should 
be f.o.b. shipping point. When f.o.b. destination, the charge 
should be crossed off. If the buyer paid the charge and the 
shipment was to be f.o.b. destination, the amount should be 
entered on the flag as a deduction to be credited to the "Freight 
to be Deducted" account. If the buyer stands the charge, the 
amount should be entered on the flag as an additional cost of 
the material. 

If the vendor's invoice includes the freight charges, their 
amount should be checked as if an original bill rendered by the 
transportation concern. When a vendor has delayed shipment 
on his own responsibility, he may ship them by express, C.O.D. 
If the goods are bought f.o.b. shipping point the purchaser is 
responsible only for a freight charge and is entitled to deduct 
from the invoice the difference between the express and the 
freight charges. 

Receiving and Checking the Goods 

As discussed in previous chapters the receiving department 
is usually responsible for the inspection of incoming shipments 
as well as their receipt. The larger the concern, the more im- 
portant its work. The volume of business of a small concern 
may not justify the employment of a special receiving and in- 
spection clerk, in which case the work devolves upon the 
storeskeeper. 

Although the receipt given to the transportation agency 
indicates that the shipment has been received in apparently 
good condition, this acknowledgment does not waive any claim 
for damages if, after unpacking, goods are found to be broken 

2S 



386 



PROCUREMENT BY PURCHASE 





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COMPLETION OF THE PURCHASE CONTRACT 



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388 PROCUREMENT BY PURCHASE 

or short due to pilfering or the loss of a package. To insure 
the accuracy of the inspection and count and to guard against 
the possibility of the clerk shirking his task, it is customary not 
to furnish him with any information relative to the quantity 
called for by the original order. He makes his count inde- 
pendently and enters his figures on a purchased materials 
received report (Form 82) made out in triplicate. Spaces are 
provided on these reports for the vendor's name, the order 
number, and the quantity received and the quantity rejected, 
if any. The copies are signed by the inspection clerk and 
distributed, one to the purchasing department for checking the 
quantity of the invoice, another to the stores records after the 
material has been sent to the storeskeeper, while the third copy 
is signed by the stores clerk and filed by the receiving clerk for 
his own protection. In a small concern, the receiving depart- 
ment's copy of the original purchase order serves as an adequate 
receiving report. Spaces are provided for recording the receiv- 
ing data after which it is routed via the materials control de- 
partment to the purchasing department. 

The inspection of the quality of purchased goods is a 
technical problem that every concern solves in its own way. 
But if the quality is finally decided to be unsatisfactory as a 
result of careful tests, the quantity to be rejected is noted on 
the materials received report, and in addition a rejection report 
(Form 83) is made out, to furnish more detailed information 
than can be shown on the materials received report. The 
general information on the rejection report is similar to that 
on the materials received report, but the former describes the 
tests made and why the material fails to meet the requirements. 
This information enables the purchasing department to prepare 
its claim against the vendor. 

When a discrepancy appears between the quantity shipped 
and the quantity received, the purchasing department should 
instruct the receiving clerk to inspect the packages again and 



COMPLETION OF THE PURCHASE CONTRACT 



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390 PROCUREMENT BY PURCHASE 

count the items in an effort to locate the missing articles. If 
the material billed on the invoice is of the same quantity and 
quality as that reported as received, the invoice checker makes 
a notation to this effect on the invoice flag, attaches the ma- 
terials received report and the transportation bill, if any, to the 
invoice, and forwards the documents to the clerk in charge of 
the follow-up file of purchase orders for entry of the neces- 
sary data on his records, as next to the last step in the approval 
routine. 

Adjustment of Discrepancies 

Before being considered as finally approved for payment, 
the invoice should be reviewed by some departmental authority 
— usually the purchasing agent. A convenient method of 
bringing to his notice any discrepancy is illustrated in the 
"memorandum of discrepancy in invoice" (Form 84). With 
the necessary papers in front of him, the purchasing agent or 
other executive is in a position to decide whether the matter is 
of sufficient importance to justify negotiations with the vendor. 
The adjustment of small discrepancies may not be worth the 
time and effort involved. There is no necessity, however, to 
await the completion of the checking of the invoice before 
bringing discrepancies to the attention of the purchasing agent. 
If a discrepancy memorandum is made out when the error is 
first noticed, the checking can proceed, as the memorandum 
furnishes adequate data for action in securing an adjustment, 
while the absence of an approving signature in the appropriate 
space on the invoice flag signifies that the approval is incom- 
plete. 

The adjustment of claims requires careful attention, tact, 
and patience. Whether the claims are settled or not before the 
checking is completed, no invoice should remain unpaid when 
payment is due pending negotiation with the vendor. Instead, 
the purchasing agent should decide whether to deduct the 



COMPLETION OF THE PURCHASE CONTRACT 39I 



OATt 


CLAIM NUMBER 


MEMORANDUM OF DISCREPANCY IN INVOICE 1 


ORDER NO. 


ORDER SHIPPED BY 


DATE OF ORDER 


ORDER RECEIVED 


INVOICE DATE 


SERIAL NUMBER (PM.KA4 


INVOICE NO. (OUiq 




VENDOR 




TO SUPEPVISOB OF INVOICE DIVISION 




PUPCHASINO DEPAQTMENT 




THE FOLLOWING DISCREPANCY APPEARS 


N THE ABOVE ORDER :- 


PRICE QUOTED 


BILLED 


TERMS OFFERED 


BILLED 


FREIGHT OFFERED F.O.B. 


BILLED F.O.a. 


QUANTITY ORDERED 


BILLED 


QUANTITY RECEIVED 


ACCEPTED 


QUALITY ORDERED 


RECEIVED 


REMARKS: MATERIAL BILLED, ETfe 






SI6NEO 


DISPOSITION OF 0I5CREPANCV 






SIONEO 




SuKBvisaa or Invoice Division 




PuoouAiNa Depaktmeut 



Form 84. Memorandum of Discrepancy in Invoice. (Size Sj^x 11.) 

To be filed with the invoice, unless claim is made against vendor; then to be replaced by 
Form 8s and filed with the correspondence. 



392 PROCUREMENT BY PURCHASE 

disputed amount or to pay the invoices in full, and consider the 
amount in dispute as a claim receivable or an advance payment. 
Strictly speaking, it is more advantageous to the buyer to hold 
back all or part of the disputed amount, especially in dealing 
with an unknown or unreliable firm. The accounting is 
thereby also simplified because the deductions entered on the 
flag will be considered in making the entries in the general 
books of account. On the other hand, when the vendor is 
reliable it may be better business practice to pay the invoice 
in full and trust to the vendor to make the proper adjustment. 
Discrepancies in favor of the vendor are, of course, easily 
adjusted by crediting him with the amount. But if for any 
reason the purchasing department cannot approve an invoice, 
a memorandum of discrepancy should be retained pending 
settlement and the invoice passed for payment and entered in 
the general books. If later the adjustment is decided in favor 
of the buyer and the invoice meanwhile has been paid in full, 
the vendor may either send a replacement shipment or the 
buyer may charge him by means of a countercharge memoran- 
dum (Form 85). If the decision is in favor of the vendor 
and his invoice has not been settled in full, the buyer requests 
the accounting department, by the use of a "credit to vendor 
memorandum" (Form 86), to include the deducted amount 
in the next payment to the vendor, or by using a "requisition 
for check" (Form 87), requests that the vendor be paid at 
once. 

Payment of Invoice 

It is the duty of the purchasing department to forward the 
invoice with any other papers to the accounting department 
via the materials control department, in sufficient time to take 
advantage of the earliest discount date. In Chapter V, "Pric- 
ing the Stores Record," and in Chapter X, "Costing of 
Orders," the handling of the values of manufactured mate- 



COMPLETION OE THE PURCHASE CONTRACT 393 



COUNTERCHARGE MEMORANDUM 



CONTRA VOUCHER NUMBeR 



TO ACCOUNTING DEPARTMENT: 
PLEASE CHARGE 



Aocwess. 



TWE SUM OF. 



ON ACCOUNT OF ADJUSTMENT ON rNVOICE NO. DECIDED IN OUR FAVOR. 



CREDIT TO 


Acer. NO. 


AMOUNT 1 



















PURCHASIMO OCPARTMCNT 



OATC PA id 



Form 85. Countercharge Memorandum. (Size 8j^x5J^.) 



CREDIT TO VENDOR MEMORANDUM 

TO ACCOUNTING DEPARTMENT: 

PtEASE CREDIT ^ 



VOUCHER NUMBED 



ADDRESS . 



ON ACCOUNT OF ADJUSTMENT ON INVOICE NO DECIDED IN FAVOR OF THE ABOVE 

NAMED PARTY. 



CHARGE TO 


ACCT. NO. 


AMOUNT 1 



















PURCHAftINO DCPAftTMEMT 



ENTERCO IN 
VtXICHCas PAfAOLE 



Fonn 86. Credit to Vendor Memorandum (red ink). (Size 8>^x 5^-) 



394 



PROCUREMENT BY PURCHASE 







REQUISITION 


FOR CHECK 




VOUCHER NUMBER 




TO ACCOUNTINO OePAPTMENT: 


riATF 








noi 1 AD.1 




IN PAYMENT OF ADJUSTMENT ON INVOICE NO. DECIDED IN FAVOR OF THE 


















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AMOUNT 


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PAID BY CHECK Na 


WRITTEN BY 


ENTERED CASMrOIS- 
BURSCMEMT PIOI»TEe 


CHAROEO 



Form 87. Requisition for Check. (Size 83^x53^.) 

rials, crediting the amount to work in process and charging it 
to stores control accounts, and the entering of the total and 
unit values on the stores record, was discussed. As mentioned 
in those chapters, a similar procedure is followed for purchased 
materials. The purchasing department forwards approved 
invoices to the stores records for pricing the record with the 
invoice cost less, of course, any deduction such as shortages, 
trade discounts, etc. Any transportation charges shown are 
included as a part of the total cost. This latter amount is 
already charged to the proper stores control in vouchering 
and paying transportation agency's bill. The receipt of the 
material has been entered previously from the materials 
received report. 

The work of the accounting department is properly to ac- 
count for the purchase, to pay the debt, and to make the proper 
records of the transaction as soon as an examination of the 
invoice shows the approval to be satisfactory and that the 
invoice has been entered on the stores records. The invoice 



COMPLETION OF THE PURCHASE CONTRACT 395 

is then ready for vouchering and registering in the vouchers 
payable register (Form 88), 

A voucher can be considered as any properly approved re- 
quest for payment of a payable. Of course, not all are pre- 
ceded by the purchase routine. Some requests for payment 
originate in other ways as a "requisition for check" (Form 87), 
for pay-rolls or notes payable, or for bills covering service not 
purchased through the purchasing department. However, 
_ every payment must be preceded by some formal and approved 
'authorization of payment. 

The voucher register is divided into two sections showing 
the accounts to be debited and credited in addition to the de- 
scriptive section at the left. In the columns headed, "Name of 
Payee" and "Description" are entered the name of the creditor 
and a reference as to service rendered, whether material, 
labor, etc. 

The credit side is made up of columns headed, "Vouchers 
Payable," "Freight to be Deducted," and "Miscellaneous." In 
the first column is entered the gross amount of the invoice 
before any cash discounts are deducted and after any miscellan- 
eous amounts are deducted. In the "Freight to be Deducted" 
column is entered the amount, if any, to be deducted from 
the invoice, which amount, as previously explained, was 
charged to this account when the transportation bill was paid. 
In the "Miscellaneous" column are entered any miscellaneous 
deductions with the account symbol to be credited. On the 
debit side are the various distribution columns headed with the 
class names of the accounts to which invoices are charged, such 
as "Stores," "Expense Ledger," "Capital Assets," and "Mis- 
cellaneous," in accordance with the distribution entered on the 
voucher. Each distribution column as illustrated in Form 88 
should have a detail account symbol column for each amount 
column whenever debits to more than one control account are 
entered in the one column. During the month the individual 







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COMPLETION OF THE PURCHASE CONTRACT 397 

amounts may be posted to the proper accounts, or at the end 
of the month a recap may be made and entered at the foot of 
the column. Each entry in the Expense Ledger column is 
supported by an expense ledger slip (Form 26, page 127). 

As the pages of the register are filled with entries, the 
columns are totaled and the amounts carried forward to the 
top line of the next page. The total of the debit columns 
must equal the total of the credit columns, thus proving the 
correctness of each entry and the footings. At the end of the 
month, the columnar totals or such recaps as have been made 
thereof, are posted to the proper ledger control accounts to 
which they belong. 

Following registration in the voucher register, all approved 
invoices are filed by vendor pending payment. The tentative 
date of payment is indexed by a tickler card or the stub of the 
invoice flag (Form 81). Each day the ticklers for payables due 
that day are matched with the invoices which are then sorted 
by payee and by discount rate, so that each little stack contains 
all invoices from one vendor and having a common discount 
rate. Each day the treasurer signifies the total amount which 
can be paid. The accounting department then keeps the pay- 
ables being prepared within that amount, giving preference to 
those items which are most urgent. 

These invoices are then listed on the remittance letter 
(Form 89). The form is in triplicate and includes the bank 
check. The invoices grouped by discount rate should be listed, 
entering invoice date, number, invoice amount, deductions, if 
any, cash discount and the net amount. The discount for 
individual invoices need not be entered if the discount for a 
group having a common rate can be reckoned as one amount. 

The net amount column is then totaled, any further deduc- 
tions such as charge-backs are entered, and the total net amount 
to be paid is reckoned. Then the upper part of the form, which 
is the bank check, is written out for this total net amount. The 



398 



PROCUREMENT BY PURCHASE 



three copies of the form with the invoices should be forwarded 
to the auditor who, after checking the correctness of the vari- 



THE BUYING COMPANY 



NO. 12967 



NEW VORK^ 



PAV TO 

THE ORDER OF_ 



TO THE NEW YORK BANK, 
NEIiy VOBK, N.y. 



THE BUYING COMPANY 



TRCASURCO 



THE BUYING COMPANY, new YORK. N.Y. check no. 12987 



AMOUNT DISCOUNT 



OTHER NET 

DCDUCTPOHS AMOUNT 



Form 89. Remittance Letter (in triplicate). (Size S^^x 83^.) 

ous entries, will approve the check as regards the correctness 
and approvals of the bills. 

The papers are then separated — the original and duplicate 
of the remittance letter are forwarded to the treasurer, and 
the triplicate with the invoices, etc., attached, to the account- 
ing department where the payment of each voucher is noted 
in the voucher register, after which the papers are bound to- 
gether and filed by vendor. 



COMPLETION OF THE PURCHASE CONTRACT 



399 



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400 PROCUREMENT BY PURCHASE 

The treasurer signs the check section of the remittance 
letter original and forwards it to the payee. From the dupli- 
cate copy the cash disbursement register (Form 90) is written 
up to show the name of payee and the various debit and credit 
amounts. In the debit columns are entered any "miscellane- 
ous" amounts taken from the remittance and not recorded in the 
voucher register, and under "Vouchers Payable" the amount 
of debt paid, which is the amount previously credited to the 
account in the voucher register. On the credit side are entered 
any miscellaneous items, the "Discount Earned," and the check 
amount and number. The duplicate copy is then filed by check 
number. 

The accounting for the purchase is now completed — the 
bill paid, stores charged, and the material in the storesroom. 
The purchasing transaction is completed. 



CHAPTER XXVIII 

SOME LEGAL ASPECTS OF PURCHASING 

Necessity of Familiarity with Law 

In the purchasing agent's every-day relations with ven- 
dors, he is constantly dealing with matters which are governed 
by law. For his information and protection, therefore, he 
should be familiar with the legal rules applicable to those 
activities in which he engages. It is the purpose of this chap- 
ter to explain those features of the law of contract and of 
agency so that every purchasing agent should understand. 

"Ignorance of the law excuses no one." This is a legal 
maxim with a twofold application for our purposes. In the 
first place it is important that all parties to a contractual ar- 
rangement should assure themselves that their acts are in ac- 
cordance with the law. In the second place they should un- 
derstand fully the legal consequences of lawful acts. Failure 
in either of these directions is not excused by ignorance or good 
intentions. 

What Constitutes Our Law 

Law in the technical sense means any rule of conduct, pre- 
scribed and enforced by governmental authority. Not all the 
laws in operation today are written. Neither have they all at 
some time or other been enacted by legislative bodies. For, 
in addition to the statutes, we have the great body of "un- 
written law" which includes all those customs and decisions 
of courts which through long recognition and application have 
all the force of written laws. Our treatment here, however, 
is confined to an exposition of the law as it is and so we are 
not primarily concerned with how it came to be established. 
26 401 



402 PROCUREMENT BY PURCHASE 

Definition of a Contract 

Whenever an agreement is of such a nature that it may be 
enforced in a court of law, it is called a contract. There are 
many agreements for the breaking of which the injured party 
can have no redress in a court of law. That is to say, they 
are unenforcible. To make a contract valid and enforcible, 
certain essential elements must be present, the most important 
of which are : 

1. Agreement 

2. Competent parties 

3. Consideration 

4. Legal object 

Meaning of Agreement 

The first essential of a contract is agreement. There must 
be assent to the same thing by the contracting parties. To use 
the technical phrase, "their minds must meet." An agreement 
usually results from an ofifer made by one party, which is 
accepted by the other party. The ofifer or proposal may be 
oral or written, and the acceptance may be oral or written. 
The simplest form of contract is an ofifer to sell goods at a 
specified price and an acceptance of the goods at that price. 
If this ofifer and the acceptance are made by letter, the two 
letters taken together constitute a complete written contract of 
sale. Certain features which have been described as being 
necessary in a purchase contract may be omitted and the law 
supplies them: e.g., when nothing is said as to terms, the law 
implies cash ; when nothing is said about delivery, the law im- 
plies that the buyer will be entitled to delivery when he pays 
the price. 

Acceptance of an Offer 

The manner of the acceptance of the offer is one of the 
most important features of the contract. The ofifer must be 



SOME LEGAL ASPECTS OF PURCHASING 403 

accepted in accordance with its exact terms. To accept an 
offer in any terms other than those in which it is made does 
not resuh in a contract. The party making the original offer 
may decide to accept the new terms, in which case a new and 
different agreement than was at first contemplated will be 
made; however, he has the privilege of rejecting the proposed 
new contract entirely. 

If an offer is made to one person, another cannot accept it; 
and if open for a limited time, it must be accepted within that 
time. If no time is mentioned, then a reasonable time is in- 
tended. People cannot be held to offers made long ago and 
forgotten, nor after the circumstances which led to the offers 
have changed. What constitutes a reasonable time will de- 
pend on the circumstances of each case. 

An offer should be accepted by the same method of com- 
munication that was used in its making, unless the party mak- 
ing the offer requests an answer by another method. If the 
offer is made by mail or telegraph, it is regarded as calling for 
acceptance by the same means unless the offerer expressly asks 
for a reply by some other means. The acceptance is effective 
and the contract is made as soon as the offeree has delivered 
a prepaid acceptance to the Post-Ofiice Department or the tele- 
graph company. The contract is complete even though the 
acceptance may never be received. At any time before accep- 
tance, an offer may be withdrawn by giving notice of the revo- 
cation to the offeree. 

Finally, to make an enforcible contract, the agreement be- 
tween the parties must be one that can be proved, hence a 
written contract signed by both parties is the best evidence of 
agreement. 

Value of Having Contracts in Writing 

So far as purchasing agents are concerned, the inability 
to prove any legal agreement is a frequent source of trouble. 



404 PROCUREMENT BY PURCHASE 

This is not due to any complexity of the law, but rather to 
the fallibility of the human mind and to a lack of proper care 
in seeing that the details of every important contract are put 
down in writing. Time after time it has been impossible for 
a buyer to protect himself against a breach of contract on the 
part of the seller because in accepting an offer or in placing an 
order he neglected to insert a definite date of shipment or de- 
livery or a price as a part of the contract. 

The importance of having contracts, whether of large or 
small consequence, in writing, is one which cannot be too much 
emphasized; and when a contract is in writing, it is equally 
important that it be in the most concise and unambiguous lan- 
guage possible. Whenever a purchasing agent finds it neces- 
sary to make a verbal agreement involving a future transaction, 
he should make a point of having it confirmed by writing. 
Much trouble and litigation would be saved were this course 
always followed. 

The Parties to an Agreement 

There must be at least two legally competent parties to 
every contract. The law clearly defines who are legally com- 
petent to contract. Generally all persons are able to bind them- 
selves by contract — it is a positive right. But there are ex- 
ceptions to the general rule. Certain persons are either totally 
incompetent, or of qualified competency. Persons judicially 
declared insane, minors, and intoxicated people are examples 
of those who may generally avoid contracts entered into by 
them. In the case of minors and insane persons, however, 
contracts for necessaries are good. 

At common law, married women could under no circum- 
stances bind themselves by contract. The attempt was a nul- 
lity. By statutes, however, this disability has been to a large 
extent removed and generally today their freedom in this re- 
spect is as great as that of unmarried women. 



SOME LEGAL ASPECTS OF PURCHASING 405 

Consideration 

The third essential element of a contract is what is known 
as the '''consideration." A mere promise by one party, the 
promisor, to do or not to do a certain thing, cannot be enforced 
by the party to whom made, the promisee. The law will not 
operate in behalf of such a one-sided arrangement. To be 
en forcible the agreement must provide that some legal detri- 
ment be sufifered by the promisee. This legal detriment, this 
undertaking to do something that one is not legally bound 
to do, constitutes consideration. The value of the considera- 
tion as compared to the value of the promise is immaterial. 
The requirement of law is satisfied if the promisee undertakes 
to do or does anything which he is not already bound to do and 
which is legal in its nature. 

In ordinary practice when no consideration is mentioned 
in a purchase order, it is understood that the buyer agrees to 
pay a reasonable amount for the goods and a contract is made. 
However, the determination of what is a reasonable price 
causes many disputes. Usually it will be determined as the 
market value at the time of delivery. 

Lawful Purpose 

The fourth element of an enforcible contract is that "the 
agreement must be made for the purpose of accomplishing 
some lawful purpose." An agreement to do anything contrary 
to law is unenforcible. An agreement to do anything which, 
while not directly contrary to any special statute, would be 
injurious to the good order, the health, or the morals of the 
community, is against public policy and would be unenforcible. 

An agreement in restraint of trade is illegal. The Supreme 
Court, however, has decided that agreements in reasonable 
restraint of trade are not. Thus, when a person sells out his 
business to another he may agree never to engage in that busi- 
ness again within certain reasonable territorial limits — usually 



406 PROCUREMENT BY PURCHASE 

the limits of the territory which his business actually covered. 
Such a contract is enforcible. 

It is highly unlikely, however, that the purchasing agent 
will ever have occasion to be concerned with the lawful pur- 
pose of a contract. Sound purchasing precludes the possibility 
of unlawful purchases of any nature whatsoever. 

Sale; Contracts 

Although contracts are of varied nature, those in which 
the purchasing agent is interested are confined within narrow 
limits. He is interested primarily in only two kinds : purchases 
and contracts to purchase. Or, to express the same thing from 
the point of view of the vendor : sales and contracts to sell. 

The distinction between the two is apparent from the 
definitions given in the Uniform Sales Act, which follow: 

A sale of goods is an agreement whereby the seller trans- 
fers the property in goods to the buyer for a consideration, 
called the price. 

A contract to sell goods is a contract whereby the seller 
agrees to transfer the property in goods to the bnyer for a 
consideration, called the price. 

The difference, then, between a sales and a contract to sell 
consists in this : Where the effect of the transaction is to pass 
title to the goods at once, delivery takes place and there is a 
sale; where title is to be passed at some later time, there is a 
contract to sell. For instance, a buyer is offered a lot of speci- 
fic goods which cannot be duplicated. If he accepts the offer, 
the transaction is a sale — not a contract to sell. Delivery takes 
place at once although the seller may still have possession of 
the goods and the purchase contract may state delivery is 
"f.o.b. destination." This statement regards price rather 
than the time of delivery. 

The importance of the distinction between these two types 
of contract arises from the fact that where the title is there the 



SOME LEGAL ASPECTS OF PURCHASING 407 

risk of loss rests, as well as the rights and liabilities of owner- 
ship generally. If fire destroys or thieves steal, he who holds 
title is the loser. On the other hand, any benefits arising from 
the thing owned belong to the owner. It should be one of the 
objects of the purchasing agent's concern, therefore, always to 
know whether he is negotiating a sale or a contract to sell. 

Caveat Emptor 

An important rule of general application in the law of 
sales is that of caveat emptor — "let the buyer beware." This 
rule is designed to make men careful when buying and to dis- 
courage resort to the courts. What the rule means as applied 
to specific articles is that when the buyer has opportunity to 
inspect such articles before purchasing, he is responsible for 
any defects in them or mistakes with reference to their charac- 
ter. This does not, however, excuse the seller if he deliber- 
ately conceals a defect. In such a case, the buyer may rescind 
the contract. 

Express Warranties 

If a buyer wishes to protect himself against the rule of 
caveat emptor, he may do so by exacting a warranty from the 
vendor. As a matter of fact, a transfer of commodities rarely 
takes place without some conditions or warranties as to quality, 
utility, or other characteristics of the commodities sold. Only 
warranties given by a seller to his customer hold, as warran- 
ties of one vendor do not pass on in case of resale. 

An express warranty is a statement made by the seller about 
the quality, durability, working ability, etc., of the article 
sold, in order to induce the buyer to purchase. The purchaser 
must have bought the goods in reliance on that statement. If 
he relies on his own judgment and selects the goods himself, 
there is no warranty even though the seller made a statement 
of fact. 



408 PROCUREMENT BY PURCHASE 

Any statement of fact or any promise by the seller in re- 
gard to the quantity, quality, or title of a commodity is an 
express warranty, if the natural effect of such a statement is 
to induce the buyer to purchase the goods relying on such 
statements. It must not be forgotten that the burden is on the 
buyer to see that each purchase is covered by the necessary 
warranties. It should also be borne in mind that a warranty 
should be in the most definite terms possible, such as a specifica- 
tion. If a seller is willing to warrant his goods, he will not 
be afraid to say so in plain language if the buyer insists upon 
it. If the seller is not willing to make a definite warranty, it 
is better for the buyer to know it beforehand and to realize that 
he is relying on his own judgment and can claim nothing from 
the vendor if the goods prove unsatisfactory. A written 
warranty prevents forgetfulness on the part of the seller. 

Expressions of Opinion 

It is important, though difficult in many cases, to distin- 
guish between a warranty and a mere expression of opinion, 
unless the terms of the warranty are sufficiently explicit to 
define the exact conditions which the warranty is to cover. 
For example, the expression "best on the market" cannot be 
considered a warranty, inasmuch as no definite statement is 
made as to specific purposes for which the material may be 
better than some other material. Every vendor is allowed a 
certain Hberty in "puffing" his wares. Many expressions, 
moreover, are cleverly worded to give the impression of being 
statements of fact, while still permitting the parties making 
them to escape legal liability. Any such phase as "it is esti- 
mated," "there seems to be," "experts estimate," or any phrase 
which qualifies the simple statement of fact, makes the assertion 
a mere worthless expression of opinion. On the other hand, 
the expression "as good or better" than a specified product 
for some definite purpose may be considered a warranty. 



SOME LEGAL ASPECTS OF PURCHASING 409 

Express warranties are usually insisted on by the buyer and 
in most cases are in the form of definite specifications, although 
they are frequently put forward by the seller in order to per- 
suade the purchase of his goods rather than a competitor's. 

Implied Warranties 

In addition to so-called express warranties, in every sale 
transaction there are certain implied warranties, which the law 
requires the seller to make good. The most important warran- 
ties of this type may be defined as follows : 

1. Warranty of title. That is to say, the seller has the 
right to sell the goods, or if it be a contract for future sale, that 
he will have the right to sell when the time for the sale arrives, 
and that the goods are free from any claim, charge, or encum- 
brance at the time of sale. 

2. Fitness for purpose for which bought. If the buyer 
makes known to the seller the purpose for which he intends to 
use the goods, or if this purpose is known to the seller, there 
is an implied warranty that the goods are fit for the purpose. 
If, however, the buyer orders goods by their trade-names, the 
seller is relieved from any warranty that they are fit for his 
purpose, unless it can be clearly shown that in a contract for 
goods to be used for certain definite purposes, the seller defi- 
nitely offered certain standard goods, under their trade-names 
as being fit for such purposes, as clearly set forth by the buyer. 

3. Conformity with description. If the buyer orders goods 
by description there is an implied warranty that the goods 
furnished shall meet the requirements of the description. 

4. Conformity with sample. If goods are bought by sam- 
ple, the buyer can rely on the implied warranty that they are 
up to the sample. 

The fact that certain implied warranties arise by operation 
of law or otherwise, should not prevent the buyer from obtain- 
ing positive written guaranties on all important purchases. 



410 ' PROCUREMENT BY PURCHASE 

Destruction of Subject Matter 

When the goods offered for sale do not exist at the time 
the agreement is made, and in addition are of a character that 
cannot be duphcated, no contract arises as the subject matter 
is without existence. In case subject matter of like peculiar 
character is destroyed, through no fault of the vendor, subse- 
quent to the making of the contract and before the time for 
performance, although a contract has arisen, it is said to be 
discharged. 

Where the contract is not for any specific articles, but only 
for so many feet of lumber, bushels of wheat, etc., the destruc- 
tion of the wheat or lumber which the seller had at the time 
the contract was made would not excuse him from performing 
it. He must go out and buy more to replace what has been 
lost. In such a transaction the agreement of sale should be 
very definite as to the time when the ownership is to pass from 
the seller to the buyer. Much may depend on this fact. 

Mistakes in Contracts 

The mistakes possible in making a contract are of two 
kinds : a mistake as to whom one is dealing with, as to what the 
agreement is about, or what is to be done under the contract; 
and a mistake as to the quality or the value of the subject the 
contract deals with, or its legal effect. 

A mistake under the first heading will mean that there is 
no contract. A party cannot be forced to observe a contract 
with someone with whom he did not intend to contract. The 
parties must be considering the same thing and must be agreed 
as to what is to be done about it, or there is no meeting of their 
minds and no contract. The fact of mistake is sometimes very 
hard to prove. 

If, however, there was no mistake as to what the contract 
was about or what was to be done, the fact that either or both 
of the parties believed that the subject of the contract was 



SOME LEGAL ASPECTS OF PURCHASING 411 

more or less valuable than It actually was, will not make any 
difference in its enforcement. An agreement has been made 
and both parties are held to it even if it means loss to one of 
them. 

If a person knows that the instrument he is signing is a con- 
tract, and fails to read it, he will be bound by it even though 
it is a contract to do something entirely different from what 
he intended. No one should sign contracts without reading 
them. One does so only at his peril. 

If, however, through the fault of some clerk in writing 
the contract, an error of some sort creeps into the written docu- 
ment so that it misrepresents the actual agreement between the 
parties — i.e., a clerical error — the court will order it to be re- 
written to express what the parties agreed upon. 

What Constitutes Fraud 

If any false representation is made by a person who knows 
it to be false or has no positive belief or adequate knowledge 
in regard to the matter, intending to induce action by creating a 
false impression in the other party's mind, or to prevent him 
from investigating to find out the truth about the transaction, 
it amounts to a fraud. Fraud practiced on a party to a contract 
will excuse performance on his part. Misstatements about un- 
important matters or mere expressions of opinion in recom- 
mending an article for sale, do not affect the contract. The 
buyer must allow for overstatements of opinion by the seller 
as to the virtues of the article he is selling. 

If the reading of a contract indicates fraud, the injured 
party may refuse to be bound by it or he may claim damages for 
the injury sustained. This rule holds good also whenever the 
legal effect of the contract has been misrepresented or when a 
fraudulent value is placed on that which is being bought or 
sold. An injured party must act promptly after he discovers 
fraud. By delay he may lose his rights. 



412 PROCUREMENT BY PURCHASE 

If some of the material representations by which one party 
induces another party to enter into the contract are fraudu- 
lent, the fact that most of the representations are honest will 
not make the contract good. But if the fraudulent representa- 
tions refer to matters of no consequence and are not material 
to the contract they will not affect it. Also, if the party relied 
on his own judgment in the matter, rather than upon what was 
told him, the misrepresentation will make no difference. 

Fraud in any of the negotiations leading up to a contract 
will nullify it. If fraud has prevented the party from making 
an independent investigation, or if it has led him astray in 
regard to the facts, it will render the contract voidable. 

As has been already said, where fraud occurs the party 
entering into the contract may refuse to perform his share 
of the agreement. If the contract has already been carried 
out, he may recover his property or its value. If he wishes to 
annul the contract, however, he must return anything he has 
received under it unless it has been consumed or destroyed at 
the time he discovers the fraud. Should he prefer, he may 
let the contract stand and claim damages for whatever loss 
he may have suffered. 

Alteration of Contracts 

The parties to a contract may alter it if they can agree on 
the changes to be made. If it is a written contract, one of the 
parties may make alterations in the contract itself with the 
consent of all the other parties, or the parties may make a new 
written contract. 

If the same parties make a new agreement about the same 
subject which is entirely inconsistent with the old agreement, 
the old agreement will be regarded as set aside by the new. If, 
however, there is any part of it which is not inconsistent with 
the new, that part still remains enforcible. Any alteration in 
a written contract by one of the parties without the consent 



SOME LEGAL ASPECTS OF PURCHASING 413 

of the Other, makes the contract of no effect as against, the 
other, as this amounts to fraud. If a person, not a party to the 
contract, and not acting for any of the parties to it, should 
make alterations in it, they would be treated as though they did 
not exist. The nature of the original contract could be proved 
by the testimony of the parties, and the contract would be 
enforced as it stood before the alterations were made. The 
best way to change an existing contract is to make a new 
written agreement signed by all the parties. 

It is not safe to leave any written instrument with unfilled 
blanks. A contract should always be stated in the most simple 
and intelligible language, and the parties should go over it 
carefully to make sure that all of the terms are clear and 
complete. 

Interpreting a Contract 

Though a contract should be so clear that its meaning 
may be easily understood, as a matter of fact many agreements 
are far from clear and all sorts of disputes arise over their 
meaning. A contract is interpreted so as to carry out the 
intention of the parties as nearly as may be. The court will 
try to interpret a contract in such a manner as to make it 
lawful and enforcible. In this matter, law and common sense 
coincide. 

In getting at the intention of the parties where the contract 
is not clear, anything which is unessential and tends to confuse 
the meaning will be disregarded. If there are two statements 
which absolutely conflict, the court will consider that the first 
gives the true meaning and will disregard the contradiction. 

The parties may bring in evidence to show the meaning of 
any technical terms used, or to prove some well-recognized 
custom or usage of business which will explain the meaning 
of certain terms, or which may be considered part of the 
contract. 



414 ' PROCUREMENT BY PURCHASE 

Rules of Interpretation 

There are certain general rules which the court will always 
follow to get at the meaning of a contract. One is that in 
a printed form which has been filled out, if the written and 
printed words are inconsistent the court will disregard the 
printed words. If any words or phrases are inconsistent with 
the rest of the contract and a clear intention can be gathered 
from the rest without them, the court will treat them as 
superfluous. 

If a general term is used, such as an agreement to do the 
"mason work" on a building, and it is followed by the mention 
of any specific kinds of mason work, such as "stone and brick 
work," "plastering," etc., it is a contract to do only the special 
kinds of mason work mentioned and not all the mason work 
on the building. In order to make a general contract for all 
the mason work, this intention should be clearly stated. 

If any of the terms of a contract were intentionally made 
ambiguous by one of the parties for the purpose of taking 
advantage of the other party, the court will interpret the doubt- 
ful terms in the way that will least favor the party at fault. 

In trying to decide what the parties intended where the 
meaning is doubtful, the court will be influenced by the words 
and the acts of the parties at the time of making the agree- 
ment, or by the manner in which they have carried it out since. 
Their manner of carrying out the conditions shows what 
they understood by the agreement. 

Assignment of Contract 

Any contract, as a rule, can be assigned by any party 
entitled to rights thereunder, unless it involves a personal 
element, or is prohibited by the contract itself. The proper 
method of assigning a contract is to indorse it. The indorse- 
ment is usually written on the back of the contract. Any form 
of assignment, however, which cuts off all control of the 



SOME LEGAL ASPECTS OF PURCHASING 415 

assignor over the contract, will be sufficient. Liabilities under 
a contract cannot be assigned by a party. 

The assignee receives the rights which the original party 
had. When a contract has been transferred to an assignee, he 
should always notify the other parties to the agreement. Unless 
such notice is given, the parties not knowing of the assignment 
may act in such a way as to prejudice the rights of the assignee. 

Most of the things that a man may do for himself, he 
may do through another. Sometimes a person may do for 
another what he cannot do for himself. Thus a minor may 
act as the agent for a competent person in the execution of a 
contract, which he is without power to enter into on his own 
account. 

Acting as an Agent 

An agent is one who is authorized to represent and does 
represent another person in transactions with third parties. 
The person represented is known as the principal. The person 
appointed is known as agent, factor, broker, attorney, proxy, 
or representative. The relation existing between the principal 
and the agent is termed agency. Anyone capable of transacting 
his own business may appoint an agent to act for him in the 
same matters. The California Code expresses it as follows: 
"Any person having capacity to contract may appoint an 
agent." The person who appoints an agent must be, there- 
fore, capable of transacting his own business; that is, when 
he appoints an agent, he must be sane, sober, and capable of 
acting for himself. 

General Agents 

There are two kinds of agents : general agents and special 
agents. A general agent is one authorized to assume entire 
charge of his principal's business, or all of some kind of 
business, or all of his principal's business at some particular 



41 6 PROCUREMENT BY PURCHASE 

place. A general agent has unrestricted powers to deal along 
the line in which he is engaged. 

Unless notified to the contrary, parties dealing with an 
agent have the right to presume that his agency is a general 
one, and that he is authorized to do anything usually done in 
such a business. In doubtful cases, however, for his own 
protection the third party should always ascertain the extent to 
which an apparent general agent has authority in the line in 
which he is dealing. 

A purchasing agent is a general agent with power to bind 
his principal in contracting to buy materials on his individual 
judgment, and largely acting upon his own initiative. His 
employer controls and limits his general policy, but he does 
many specific acts at his own discretion, delegating authority in 
minor details to subagents who answer to him for what they 
do. In the same way, a sales department is the agent for a 
vendor, and the salesman is an agent — though usually not a 
general agent — of the sales department. 

Special Agents 

A special agent is one authorized to act in a specific trans- 
action or in a limited line of business. The authority of a 
special agent is not so broad as the authority of a general agent. 
A special agent is authorized to do some special thing. He 
may make, for instance, but the one contract or the one sale 
for which he has been appointed. Should he do some other 
special thing, which he might honestly consider more to the 
interest of his principal, he would depart from his instructions, 
he alone would be liable and his principal would not be bound. 
In dealing with a special agent engaged for a particular trans- 
action, the third party should ask to see the agent's authoriza- 
tion, which is usually in writing. 

In any case where one acts as agent for another without 
authorization, his act may be ratified by the principal. Sub- 



SOME LEGAL ASPECTS OF PURCHASING 417 

sequent ratification has the same effect as prior authorization. 
There are two ways in which a principal can ratify. He may 
do so expressly, or, by accepting the benefit of the action, 
he may imply his acceptance. 

Liability of Principal 

A principal is liable for carelessness, deceptions, false 
pretenses, or wrongful acts of any kind committed by an agent 
in carrying out the purposes of his principal. The principal is 
liable to third persons for any damages arising from the 
mistakes or the negligence of an agent while acting in his 
service, though he is not liable for the agent's acts not within 
the scope of his agency or employment. 

An agent in any recognized position has the usual authority 
pertaining to his position, unless limitations are expressed in 
his contract with the principal. If he exceeds his real authority 
as between himself and principal, he is liable to his employer 
to that extent. He may be discharged from his position and he 
may be held for damages should he be responsible. H he 
perpetrates a fraud on a third party while transacting his 
principal's business, both principal and agent are liable and the 
agent will not be able to shift entire responsibility to his princi- 
pal. In most cases where an agent deals with third parties, the 
third parties depend upon the agent to inform them correctly 
as to the extent of his authority. If the agent deceives them 
as to this, he makes himself personally liable to the third party 
to the same extent that he would if he had made the contract 
in his own name instead of that of his principal. If the agent 
has apparent authority but is limited by private instructions 
from his principal, he can nevertheless bind his principal by his 
contract within the scope of his apparent authority. In such 
a case, he is liable to his principal for any unwarranted action. 

It is unsafe for a third party to deal with an agent without 
sufficient information as to his authority. Whenever dealing 



41 8 PROCUREMENT BY PURCHASE 

with an agent, the purchasing agent should investigate to 
determine who is the principal and how far the agent's 
authority extends. To whatever extent he then accepts the 
relation of agency, to that extent he is dealing with the principal 
through the agent — the latter serving as the means of com- 
munication. When the contract is signed, the agent signs as 
agent and the principal, not the agent, is bound. After that, 
the agent is disregarded in the ordinary course of events and 
would not figure in the contract except as a witness able to 
give evidence in case of dispute. 

Oftentimes in case of breach, it would be worth while to 
proceed with an action for the moral effect upon a vendor, 
whereas at other times it is more expedient to drop the case 
than to compel him to fulfil his part of the contract by court 
action. Any such situation requires careful and individual 
consideration, but usually it is better to keep matters out of 
court. 

It is best always to prevent later difficulties which might 
lead to court action, by carefully observing the proper legal 
precautions in making the contract and in the effort made to 
secure its peaceful enforcement, rather than by attempting to 
collect damages by suit later on. And it is usually far better 
and cheaper for the purchasing agent and his department to 
secure a settlement in a contested case out of court than in 
court. Litigation, like war, is the last resort. 



CHAPTER XXIX 

ORGANIZATION AND PERSONNEL 

Two Types of Purchasing Control 

The difficulties involved in effecting an efficient purchasing 
organization are inherent in the nature of the work itself, as 
its activities must co-ordinate precisely with every department 
and every unit of the organization even though some may be 
situated in widely separated parts of the country. The diffi- 
culties in the way of an effective central purchasing control 
where the units are widely separated are many, and however 
effective the central control, the performance of subordinate 
purchasing functions at each plant cannot be eliminated. The 
main question of organizing the purchasing function of a 
scattered organization is the extent of authority to be given to 
subordinate functions. 

Since the purchasing efforts must be co-ordinated, the work 
must be standardized under the direction of the central depart- 
ment. The subsidiary purchasing organizations will usually be 
permitted to order on their own judgment supplies for im- 
mediate needs, subject of course to the standards established by 
the firm and to all existing blanket contracts for those materials 
usable by the individual plants. To control the situation, copies 
of all orders for materials and supplies, wherever they may 
originate, must pass through the central office for its informa- 
tion and inspection. 

Organization of Subsidiary Offices 

The internal organization of each subsidiary purchasing 
department should be identical with that of the central de- 

419 



420 PROCUREMENT BY PURCHASE 

partment, whose organization is the subject of this chapter, 
although when the volume of work is sufficiently small the 
duties of several central office workers or groups may be com- 
bined in one in the branch office. The head of each subsidiary 
department usually has his hands strengthened to the extent 
of retaining the title of purchasing agent, his chief at the 
central office being known as the general purchasing agent. 

The Central Office's Purchases for Distant Plants 

The work of the general purchasing agent is not alone that 
of supervision, but is to direct and initiate all big things. His 
office keeps a careful record and check on all material ordered 
by the subordinate offices. He assists in determining standards 
and preparing specifications. He is responsible for co-ordi- 
nating his subsidiary departments with the other departments 
of their units. 

From his position at the general office, he is acquainted at 
all times with the needs of the business as a whole and is 
enabled to initiate the placing of most contracts covering future 
requirements of materials and supplies for all plants. In fact, 
specializing on the big things, he will extend the ordinary range 
and quantity of contracts and, by so doing, he will obtain better 
prices than any of his subordinates could obtain in contracting 
for the needs of their particular plant alone because of the 
heavier purchase. 

Control of Subordinate Purchasing Departments 

The exact amount of responsibility which can properly be 
pla!ced on the subsidiary organization depends upon the nature 
of the business and the personnel of the department. For in- 
stance, an organization which is able to place blanket contracts 
for over 90% in value of the materials which its subsidiary 
plants require, permits its subsidiary purchasing organizations 
to order practically all other materials wherever it chooses, to 



ORGANIZATION AND PERSONNEL 42 1 

place all emergency orders, and to write all orders for the 
delivery of materials covered by blanket contracts — the one 
requirement being that a copy of the purchase order be fur- 
nished to the central office. This secures the co-operation of the 
detached plant and saves time. 

Thus on all important purchases the vendor, the price, and 
similar details are arranged in the contract made by the central 
organization of buying specialists ; while on the less important 
orders, the judgment and arrangements made by the subsidiary 
department are carefully reviewed by the central office. 

In another concern, by means of a "local order" form, the 
detached organization secures locally any emergency material, 
such as repair parts, supplies, or materials required to make up 
deficiencies. One cop}^ of the order serves as a purchase requi- 
sition on the central office, which issues a confirming purchasing 
order for the material already delivered to the detached or- 
ganization. While this keeps the control even more central- 
ized, it adds clerical work without a compensating gain. 
Whatever the method of control, it must be simple, direct, 
and effective, especially if it is to avoid creating a red tape 
atmosphere. 

The company which has all parts of its business located 
in one plant has a comparatively simple purchasing problem so 
far as the control of the work is concerned. Inasmuch, however, 
as the "scattered" type of organization — though its operation 
is more difficult — follows the organization and methods of the 
concentrated concern, the discussion of the detailed organiza- 
tion in this chapter is of the simpler type which is merely dupli- 
cated to adapt it to the scattered type. 

Qualifications of a Purchasing Agent 

The man who presides over the purchasing function — the 
purchasing agent or director of purchasing — needs to be a man 
of high ability and unusual qualifications. There has been much 



422 PROCUREMENT BY PURCHASE 

discussion of the qualifications that the ideal purchasing agent 
should possess. Personality cannot be standardized. Dif- 
ferent men will attain the same results by widely different 
methods. No man can quickly change his own personality to 
any great extent and retain his effectiveness. Generally speak- 
ing, the man who is anxious to succeed may borrow freely what 
is effective in others, but in the last analysis he must capitalize 
his own inherent qualities. The purchasing agent, like every 
other employee, must possess health, honesty, ability, initiative, 
a knowledge of the business, tact, industry, open-mindedness, 
sincerity, and enthusiasm. No one will have all these qualities 
in equal degree but no one need be absolutely disqualified if he 
falls below the average in one or two of them. His tactlessness, 
for example, may be forgiven because of his sincerity and en- 
thusiasm. The best way of arriving at an estimate of the 
particular qualifications the purchasing agent should possess, 
is to review his duties somewhat in detail. 

Duties of Purchasing Agent 

First of all, he is the director and administrator of the 
purchasing department, exercising an oversight over all the 
factors involved and supervising the entire routine work from 
the checking of the purchase order requisition to the handling 
of claims. He is the point of contact between his organization 
and the sales world, and as such he must be tactful and sincere 
and the true representative of the ideals of his organization. He 
must have a certain and exact knowledge of the processes and 
principles, not only of purchasing but also of selling. He should 
have a knowledge of the business in which he is engaged, of the 
materials which it uses, and the processes of manufacture in- 
volved. He should know, in a general way, the quantities 
required, something of seasonal variations, and the general 
problems of his own concern relating to equipment, finances, 
and personnel. In short, he needs to be a bigger mati than any 



ORGANIZATION AND PERSONNEL 423 

employee, and must possess in addition certain technical in- 
formation regarding what he is to do and how he is to do it. 
If he has open-mindedness, tact, and the ability, he will be able 
to make a success of the work even though at the time he takes 
the position he is ignorant of many of the methods and prin- 
ciples involved in some parts of the routine. If he has the 
proper subordinates and wins their co-operation and good-will, 
he can soon make good his deficiencies. Subordinates with 
brains and knowledge are generally able to carry a business to 
success if the right man is at the head and is able to co-ordinate 
their work. In time he will have all that he needs to know and 
the business will be stronger and better than ever before. 

As the organization of the purchasing department and the 
duties of its personnel are determined by the nature of the work 
to be done, a list of the routine operations performed with each 
order, will indicate the divisions of work within the depart- 
ment: 

1. The discovery of the need of the material. 

2. Writing the purchase order requisition. 

3. Checking the requisitions with standard specifications, etc. 

4. Securing quotations for the material. 

5. Writing and placing the order. 

6. Following up the order and effecting the delivery. 

7. Recording and checking the invoice. 

8. Receiving and checking the shipment. 

9. Paying the invoice. 

This tabulation summarizes the work in connection with a 
purchase order. As operations i and 2 are handled in the 
materials control department ( see Chapter XVI ) , the purchas- 
ing department begins its work with operation 3 and ends with 
the completion of operation 7. The receiving and checking of 
the shipment is handled by the receiving department, while the 
paying of the invoice is the work of the accounting department. 

In many respects the organization of the purchasing de- 



424 PROCUREMENT BY PURCHASE 

partment is on lines similar to the organization of the stores 
departments. Operations 3 to 7 constitute separate divisions 
of work and in a large organization each division has its own 
head who is responsible to the purchasing agent for the proper 
performance of its routine duties. This is shown in Form 91, 
"Chart of Purchasing Department Organization." In a small 
organization in which the purchasing department consists of 
only a few employees, the number of divisions will be fewer, 
one clerk performing two or more operations. Nevertheless 
each operation must be done by someone and, if possible, the 
organization should be laid out along the indicated lines. 

In the division of the work the collection of statistical data 
as to the trend of the market and of other information of par- 
ticular interest to the purchasing agent, is assigned as part of 
the work of the purchasing department, although in a large 
organization it might better be the task of a statistical depart- 
ment. In the same way the traffic work in connection with 
incoming shipments would devolve upon the purchasing de- 
partment, only if there is no traffic department as described in 
Chapter II. 

Planning Division 

Like the planning division of the materials control depart- 
ment, the planning division of the purchasing department is the 
section which starts the departmental machinery in operation. 
It is the usual representative of the purchasing department in 
all work dealing with standardization, specifications, contracts, 
and similar matters. In the routine of purchasing, it super- 
vises each transaction requiring individual judgment and at- 
tention. The records of market movements, of general sources 
of supply, the catalogue files and data of a general nature are in 
charge of this division. In other words, all the large phases of 
purchasing are handled here. 

All incoming purchase requisitions are received by the 



ORGANIZATION AND PERSONNEL 



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426 PROCXJREMENT BY PURCHASE 

planning division head after having the quotation record at- 
tached. He then carefully reviews the requisition for accuracy 
and completeness of detail, particularly of specifications of 
quantity and quality and delivery date. If the requisition is not 
correct, it is returned to the originator. When approved, if the 
time for delivery is short, he indicates that fact and advises 
whether or not the order is to be placed at the same price as a 
past order without waiting for bids. If bids are to be requested, 
he notes on the requisition the vendors to be solicited, and 
passes it and the quotation record to the next division. There 
should then be no further cause for delay in the routine of 
purchasing. 

Incoming circulars and correspondence addressed to the pur- 
chasing department should be opened and distributed by the 
head of this division. Such mail matter contains many sug- 
gestions and offerings from sellers of new materials which 
may be of interest. The planning division refers such informa- 
tion to the interested parties and receives their report as to 
whether the new material is worth consideration as the new 
standard. Thus the planning division is the chief point of con- 
tact between the purchasing department and the factory. 

The assistant purchasing agent is the logical head of the 
planning division. However, if he is not technically trained, the 
member of the department who, next to his chief, is most 
adequately trained, should be selected. When thoroughly 
trained in the purchasing technique, he is a fit candidate as 
assistant purchasing agent. 

Quotation Division 

The planning division refers all purchase order requisitions 
after approval to a quotation clerk in charge of one or more 
assistants. It is his duty to send out inquiries for quotations 
and to interview salesmen who call in answer to requests for 
quotations. While no orders are placed without proper requi- 



ORGANIZATION AND PERSONNEL 4^7 

sitions, quotations offered by salesmen are acceptable at all 
times and are properly incorporated in the records. 

In the organization of exceptional size where the purchasing 
agent or his assistant are such big men that they have no time 
to waste on the usual salesmen, individual members of the 
quotation division specialize in the general classes of materials 
purchased, such as the major raw materials, hardware, mis- 
cellaneous supplies, and so on, each interviewing all salesmen 
who offer his particular lines. 

However, salesmen may upon occasion be referred to the 
purchasing agent, to another division, or even to a member 
of some other department. For instance, a salesman intro- 
ducing a new product may be referred to the planning division 
to which he may deliver his information, although the quotation 
division member might well remain during the interview. If 
he calls regarding delivery on an order already placed, he would 
be referred to the scheduling division. The salesman, that is to 
say, would be referred to whatever party desires the informa- 
tion he has to give, while the point of contact still remains with 
the quotation division. 

After the quotations are received and tabulated on the pur- 
chase order requisition, a choice of vendor is indicated on the 
requisition and signed. Then the requisition is passed to the 
typist for writing and distributing the purchase order. At 
the same time, unsuccessful vendors' bids are declined. When 
the order has been signed and forwarded to the successful 
vendor, the requisition is returned to a quotation division clerk 
so that the quotations secured on that material and the pur- 
chase order data may be entered on the quotation record, making 
it up to date and complete. Then all papers are permanently 
filed — the requisition by its serial number, the vendor's cor- 
respondence in the central filing department, and the quotation 
record in the quotation record file. 

The head of this division should have sufficient technical 



428 PROCUREMENT BY PURCHASE 

knowledge to deal with technical salesmen on their own ground. 
The assistant purchasing agent often holds this assignment. 
Unless he can speak the language and follow the explanations 
of the salesmen, he cannot attain his full usefulness. He sees 
most of the salesmen and determines whether or not they are to 
see his chief, another party, or to be referred to another divi- 
sion. At times he has need of all the trader's qualifications of 
the purchasing agent himself, as it may be incumbent on him to 
obtain the salesmen's lowest prices and best terms on the spot. 
On his ability always to produce the desired quotation, order 
record, or catalogue, will largely depend the smoothness with 
which the department operates. His division is the repository 
of half the collected data and records that give the department 
its power and its superiority over the old system of random 
buying. 

Scheduling Division 

The scheduling division attends to all follow-up connected 
with incoming shipments. Should there be no traffic depart- 
ment, the scheduling division routes the incoming shipments, 
handles all transportation matters, and checks the freight bills. 
This division maintains the follow-up tickler file and carries 
on all correspondence, both with other departments and with the 
vendor, concerning the delivery of the material. This is the 
most important function of the division. 

If the purchasing department retains direct control of all 
traffic details, the head of this division need be trained in all 
traffic details. If the traffic work is done elsewhere, he need be 
only a good correspondent and follow-up clerk. In any event 
he must be a diplomat of skill and resource, obtaining what he 
wants without losing the good-will of the vendors. Persistent 
but not offensive, he must effect his ends lest all efforts expended 
on the orders be wasted. He records his experiences on the 
dealers' reliability record of the follow-up files. 



ORGANIZATION AND PERSONNEL 429 

Invoice Division 

The invoice division of the purchasing department checks 
all invoices, making certain that they agree with the purchase 
order terms and the receiving reports, so that when the final 
approval of the purchasing department is placed on any invoice, 
it is ready for payment and only the vouchering of the amount 
remains to be done. This division also handles all purchase 
claims. 

The head of the invoice division should represent care to 
the last detail. It is here in this part of the departmental rou- 
tine that inaccuracies most often appear and where they are 
most disastrous as tangibly expressed in dollars and cents. The 
division head should be a good executive with a high standard 
of accuracy and the power to impose a like standard upon his 
subordinates. There is also plenty of opportunity for the use 
of tact and diplomacy. Upon the harmonious adjustment of 
claims against vendors may largely depend their future good- 
will and their willingness to continue to co-operate. 

Assistant Purchasing Agent 

In an organization of any size the clerks in charge of the 
divisions of work will be under the direct supervision of an 
assistant purchasing agent, who may also serve as a division 
head as suggested previously. Generally speaking, the chief 
function of the purchasing agent's assistant and division heads 
is to free the purchasing agent of detail so that he can give all 
of his time to consultation and to the larger aspects of his work. 

Ordinarily, then, the assistant purchasing agent will be 
called upon to determine what matters should receive his chief's 
personal attention, what should be handled as matters of rou- 
tine, and what he shall dispose of himself. He will himself 
then interview many of the salesmen who ask for the purchas- 
ing agent, eliminating those whose propositions cannot be 
entertained and arranging interviews for those who have some- 



430 PROCUREMENT BY PURCHASE 

thing worth while to offer. He will review and sort the 
correspondence, handling a large part of it himself. He will be 
in constant consultation with the heads of divisions, passing on 
their problems himself or referring them to the purchasing 
agent. Finally, he will be responsible for the discipline of the 
department, directing the routine, and executing the policies 
of the department. 

The assistant purchasing agent's personality and equipment 
will largely depend on his chief whose qualities he should sup- 
plement, li the purchasing agent is primarily a technical man, 
his assistant may well be first of all a trader. Generally speak- 
ing, he should be a man of a somewhat different type. The 
assistant may deal successfully with men with whom his chief 
can make little headway, and there are sure to be occasions when 
the desired result can best be brought about by having the 
assistant eliminate himself and permit the purchasing agent to 
take matters into his own hands. 

The True Function of the Purchasing Agent 

Successful purchasing is largely a matter of smoothly run- 
ning routine, but the purchasing agent himself should stand 
quite apart from it. He should have the machine constantly 
under his eye, he should be able to watch every detail of its 
operation, he should be able to detect any lack of co-ordination, 
any friction, any failure of its parts to function perfectly; but 
he himself should not be a factor in its operation. The 
mechanism should run smoothly and efficiently whether he is 
present or not. He should be able to absent himself for any 
period of time with the knowledge that, so far as the task of 
supplying his organization with its staple materials and sup- 
plies is concerned, his presence is entirely unessential. 

The type of purchasing agent who insists that every pur- 
chase order, whatever its size or the material it called for, 
should be decorated with his signature before it could be exe- 



ORGANIZATION AND PERSONNEL 43 1 

cuted, belongs to the dark ages of business organization and 
by insisting on such an absurd procedure today he proclaims 
either the inefficiency of his organization or a narrowness of 
mind that should be his own death warrant. 

The modern purchasing agent demands that he be relieved 
of all detail. His desk will be clear; In fact it almost matters 
but little whether he has a desk or not. Yet his time will be 
constantly occupied. He will find employment for every mo- 
ment that he is in his office, and perhaps he will be of most 
value to his organization in the quiet moments that he spends 
at home or in traveling, when he can think and plan. 

His Characteristics 

The purchasing agent, who has the standing in his organi- 
zation that his position entitles him to will take his part in the 
executives' daily conferences. In view of the fact that it is 
he who is entrusted with the vast sums into which the expendi- 
tures of every company soon run, it Is a short-sighted policy to 
treat him as though he were a head clerk whose sole function Is 
to fill the requisitions filed with him by department heads. The 
modern purchasing agent is more than an order placer. He is 
a technician with a sound basal knowledge of the commodities 
with which he deals and of the processes of his own plant. He 
is a trader with a keen, critical, analytical mind, a good sense 
of values. He is a quick judge of human nature and he has an 
open acquisitive mind, vision, and a student's passion for re- 
search and information. He is a diplomat with a personality 
that invites friendship and meets it half-way, that keeps the 
good-will of the vendors even when he must say no, and who 
can command service, not because he Is legally entitled to it but 
because men find it a pleasure to serve him. Lastly, he is an 
executive, not only because he has a department of his own to 
direct — in case of need his subordinates can do that for him — 
but because he must meet and deal with the other executives of 



432 PROCUREMENT BY PURCHASE 

his organization on an equal basis. With these men he must 
maintain a constant relation of harmonious co-operation. 

His Position in the Organization 

As the head of a service department it is easy for the pur- 
chasing department to drop into a position of comparative 
unimportance, executing the requests that are made upon it, 
dodging trouble, avoiding friction, living from day to day but 
exerting no positive influence in the success of the organization 
as a whole. It is here that the amount of tactful aggressive- 
ness that the purchasing agent brings to his work becomes a 
measure of his personal success and the value of his department 
to the organization as a whole. 

In asserting himself by impressing his views on all of the 
units of his organization, backing them by his exact informa- 
tion and his technical knowledge, he should be able not only to 
save money but to improve his product, facilitate production, 
and strengthen the standing of his organization in the commer- 
cial world. Here is his field for initiative and originality and 
he should not hesitate to advance his facts before they are 
solicited, and sometimes even before they are welcome. 

The wise management will aim to do whatever it can to 
strengthen the hand of its purchasing agent, not only in order 
to save time and money by really restricting every detail of 
purchasing work to a single department, but in order to help 
him to attain with the least effort his three great objects : the 
right article, with the most favorable delivery, and at the low- 
est price. Once let the idea get abroad that the purchasing 
agent is only a buffer between the salesmen and the men higher 
up, and the chief advantage of a single purchasing department 
is lost. 

The pui chasing agent, with the necessary qualities for his 
position, will be contented with nothing less than a free hand 
in his field. Such a man is sometimes called a purchasing en- 



ORGANIZATION AND PERSONNEL 433 

gineer and he ranks with the technical experts of the company 
in his speciaHzed knowledge. Yet he has a breadth and vision 
that many of them lack and which transcends a knowledge of 
technical things and makes him at home in the mazes of fi- 
nance, industrial and office management, transportation, and the 
great fenceless field called the market. Last, but by no means 
least, he will have an understanding of human nature itself and 
a mastery of the psychology of selling and of buying. Such a 
man will command a large salary but if he is worthy of his 
job he will often climb to the very head of the concern of which 
he is a part. 

38 



PART V' 
ADOPTING A SYSTEM 



CHAPTER XXX 

SYSTEMS, RECORDS, AND FORMS 

Requirements of a System 

System, regarded as the standardization of routine and 
methods, is necessary for the efficient operation of business. 
It is better to have a meager system reduced to the merest essen- 
tials and the most general outlines than to have no system at all. 
But better no system than to attempt to operate with methods 
that are not workable, or with plans properly devised but only 
half carried out. A system may be simple and yet effective. 
The chief consideration is that it be thorough and understand- 
able and one which does not demand the impossible, otherwise 
it will fail. 

The satisfactory system will avoid extremes and its plan 
and scope will be within the ability and experience of the in- 
dividuals responsible for its operation. It will not leave human 
nature out of account. It will anticipate its errors and will 
not so much hope to eradicate them as to prevent them from 
doing harm. It will be carried out to the letter in all depart- 
ments and in connection with every operation to which appli- 
cable. Before any system is introduced it should be worked 
out in all its details and should withstand criticism from every 
angle. 

Systems Not Universally Applicable 

The methods of control employed in any organization must 
suit the individual requirements of the business. No blanket 
system, record, or form is equally applicable to any two organi- 
zations without some modifications. Just as the personnel and 

437 



438 ADOPTING A SYSTEM 

characteristics of the organizations differ, so will the systems 
employed. Just as no two persons are exactly alike nar able to 
execute the same task in the same way, so are no two business 
organizations exactly alike, nor is the business routine ever 
carried on in the same way in dift'erent plants and offices. 
Again, the details to be accomplished by one system are never 
precisely the same as in any other. For instance, the purchase 
order copies illustrated here would differ in some of their 
details in every plant to conform with special needs. Yet what- 
ever may be the methods that serve as a systematic means of 
attaining a definite end, the general principles that underlie the 
methods remain the same. 

Delegation of Authority 

In planning a system there is one fundamental principle that 
should be constantly borne in mind. The executives should be 
relieved of all unnecessary detail. Whether or not they are 
willing to delegate their powers, it is extravagant to permit 
them to encumber their minds and waste their valuable time 
with anything of a routine nature that can be as satisfactorily 
performed by anyone else. 

It is the executive's work to supervise. He should watch 
the total results and accomplishments and he should receive 
reports of them daily as a matter of routine. Complaints are 
another means by which he may be kept informed of the 
operation of his department. He or his assistant should review 
every complaint received. They indicate either a failure to 
function or some defect in system or method that requires 
attention. By investigations of this nature and by a careful 
analysis of the causes he can determine how his department 
is functioning as a whole, as sections, or as individuals. Should 
he thus convince himself that conditions can be improved, he 
must first determine whether the system or the personnel is at 
fault and act accordingly. 



SYSTEMS, RECORDS, AND FORMS 439 

It is a matter of importance that as far as possible the 
responsibility for any particular transaction should be traceable. 
For this reason, on practically each form illustrated, spaces are 
provided for entry to indicate the person responsible for the 
transaction as well as to signify the completion of the job. 
The psychological effect of pinning down responsibility is that 
it leads to more accurate work. It is much easier to prevent 
errors than to adjust them afterward. 

The efficient method by which to attain any object is 
usually the direct method. Methods that waste time and energy 
and fail to justify themselves, are evidence of red tape. Red 
tape is expensive to maintain in itself and is demoralizing to the 
spirit of initiative and energy which likes to get things done, 
and thus to the individual who comes into contact with it. 

Revising a System 

To revise a system a survey of the entire situation should 
first be made. Occasionally this is done by giving a question- 
naire to each employee, on which he indicates the work he does 
and to whom he is responsible for its performance. When 
charted and tabulated, the answers to the questionnaires show 
the weak features of control and wherein the system may be 
advantageously revised or changed. But before the systema- 
tizer is competent to suggest changes he must master the details 
of operation, and understand the interrelations of departments 
and the peculiarities of the concern's problems. It may be that 
the present system is still the most practical but for lack of 
proper control has degenerated into an inefficient condition or 
it may be that methods are fundamentally at fault. Whatever 
the changes and improvements which may be suggested, it is 
well to reduce each department's work to a written manual, 
thus making certain that the duties are clearly defined and that 
there is a guide in case of any questionable items. 

It should not be assumed that a system once developed and 



440 ADOPTING A SYSTEM 

organized will automatically work or justify itself by results. 
There should be a periodical survey to make certain that 
methods are being given a fair trial and to see what improve- 
ments can be made in them and what details, if any, can 
advantageously be shifted from one department to another. 
Nor must it be assumed that the maximum efficiency of a 
revised procedure will be secured immediately. There will be 
a temporary disorganization and in some cases disarrangement 
of the work, and until employees become familiar with the 
new methods, efficiency will not be maintained at its highest. 

Records 

Thus far we have discussed records only as they have 
formed part of the problems under discussion. Something 
may now be said of records in general. Whatever its nature, 
there are at least three things which may be expected of every 
record. It should be: reliable and adequate, available and 
timely, and permanent for future reference. 

Reliability and Adequacy 

Records are kept for the purpose of tracing expenditures 
for time and materials. Therefore, unless the figures are ac- 
curate, they are less than worthless and may be a positive detri- 
ment by being misleading. The maintenance of inaccurate 
records costs more than they are designed to save, for obviously 
whatever is spent for their upkeep is wasted. If they are worth 
keeping they are worth keeping well, and the secret of accuracy 
is a means of pinning down the responsibility for any inac- 
curacies that appear in them. 

Records must be adequate if they are to serve the purposes 
of accuracy. An adequate record must present in full detail 
all pertinent information that may conceivably be required. 
These data should be kept in such a way that there will be a 
cross-reference to whatever may be the subject of the record. 



SYSTEMS, RECORDS, AND FORMS 44 1 

To illustrate, any purchase order can be located as follows — 
knowing the material, by the record of quotations or by the 
stores records; knowing the purchase order number, from the 
purchasing department's serial file; knowing the requisition 
number, from the dead requisition file; knowing the vendor, 
from the follow-up file. 

Availability and Timeliness 

Records are made to be consulted. To that end they should 
be kept up to date and accessible to whoever may wish to con- 
sult them. It may be laid down as a fundamental rule that no 
record should ever leave its department. If it is placed in a 
permanent file it should not be removed from the file. If neces- 
sary, a memorandum may be made of its data. If the card be 
taken from the file, it should be replaced by a receipt signed by 
the borrower. This receipt or "out-card" is of a size slightly 
larger than the original so as to draw attention to the fact that 
a record is missing. 

Timeliness is an important adjunct to availability. The in- 
formation on a stores record is useless if posting is a week 
behind. A balance sheet two months behind schedule is a post- 
mortem statement of conditions. Records and reports should 
be scheduled to be completed at a certain time — and someone 
made responsible and then held to that responsibility. 

While records must be readily accessible to those who need 
them, some of them may contain more or less confidential 
information which should not be open to everyone. Such 
records should be segregated and placed in charge of a con- 
fidential clerk. The bulk of the records here described are of 
a kind that can be freely consulted by all who have occasion to 
use them. Some organizations maintain distinct departments 
for maintaining routine records but these are not of material 
advantage except in the technical presentation and interpreta- 
tion of statistics. 



442 ADOPTING A SYSTEM 

Permanency 

All records should be permanent, A hasty pencil memoran- 
dum may be adequate for some things but if it is necessary 
to jot down facts in writing, in nine cases out of ten such 
memoranda should be a permanent record. 

The method of recording the data should be standardized 
by the use of a suitable form. Entries should be made 
thereon legibly and in ink and in sufficient detail so that anyone 
may understand them. 

The chief reason for making records of a permanent char- 
acter is that while their value as isolated units of information 
may be slight or almost nil, their value increases as the units 
are built into totals for comparative purposes. The best guide 
to the future is a knowledge of what has happened in the past. 
For control purposes all past performances are of future in- 
terest and the close of a transaction does not end its importance. 
Most old records are valuable and should be stored where they 
are readily accessible as soon as the crowded state of a filing 
case calls for the removal of records that are no longer current. 
Those which are no longer of value may be destroyed. 

Development of Records 

The records, as described in these chapters, are suggestive 
only in regard to form. If all were to be installed, some would 
parallel and supplement others, thus duplicating clerical work 
without increasing the business gain. Like all other systems 
and forms, they must be modified to suit the peculiar conditions 
met in individual businesses, with due regard to need and use. 

The records maintained in the purchasing department do 
not depend upon the organization or work of any other depart- 
ment. Every purchasing system demands the use of certain 
fundamental forms and records. The development of the 
stores and other records depends to a large extent upon the 
method of planning manufacturing orders and upon the desire 



SYSTEMS, RECORDS, AND FORMS 443 

of the management to know the financial situation with 
reasonable certainty. 

Purchasing Operations and Records 

Each distinct operation in the routine work of a department 
should have its corresponding records, as illustrated in the 
routine of the purchasing department : 

Operation Records 

1. Preliminary Planning Here we have the catalogues of the 

vendors, materials records, trade paper 
clippings, and information as to sources 
of supply. 

2. Obtaining Quotations The quotation record compiled from 

the catalogues, price lists, and the 
replies to direct applications. 

3. Writing the Order The serial purchase order file com- 

posed of the copies of purchase orders. 

4. Effecting Delivery The follow-up files on both vendor and 

transportation company. 

5. Checking the Invoice The follow-up files of purchase orders 

WITH the Order and from (4) and the files of the materials 

the Materials Re- received reports 

CEivED Report 

Forms — Advantages and Objections 

There are obvious advantages to be derived from the use of 
forms, and there are but few disadvantages. On the whole, 
the former outweigh the latter. 

Their primary use is to save time. As they are arranged 
to be filled out automatically and rapidly, they enable subordi- 
nates so to word their information that it becomes intelligible, 
complete, and reliable. Thus opportunities for mistakes and 
omissions are greatly reduced by their use. The routine of 
their preparation soon becomes a well-beaten track and any 
error is revealed by even a casual inspection. Essentia) data 
only is incorporated in the form and any failure to complete the 



444 ADOPTING A SYSTEM 

record is at once apparent. Moreover it is unnecessary to rely 
on the memory to include all items. The task becomes so 
plain that inexpensive clerical labor can handle even the most 
important papers under reasonable supervision. Only the 
unusual cases need be referred to the superior, and thus large 
organizations are able to handle a corresponding volume of 
work with speed and accuracy and at a comparatively low labor 
cost. 

Forms Insure a Fixed Policy 

A secondary use of forms is to prevent any deviation from 
the settled routine and system. Where they are employed there 
is a uniform procedure which does not change. Too much care 
cannot be taken with their construction but, like everything 
else devised by man, they are constantly open to improvement 
as experience and new conditions suggest changes and new 
contingencies have to be provided for. 

It is held that a printed form is unable to command the 
attention and respect derived from a well written letter or 
explicit verbal instructions. Purchase order forms, for in- 
stance, containing many conditions detailed in their expression 
and printed in fine type, have an air of being stereotyped, and 
the vendor is quick to jump to the conclusion that they are not 
applicable to him. The remedy is to make the forms as ex- 
plicit and concise as possible. They should fit the case precisely 
and should be discarded if they fail to do so. 

As stated previously, the needs of an organization, the basic 
principles underlying their solution, and the philosophy sur- 
rounding those principles, must be understood thoroughly 
before a real revision of present methods is undertaken. Then, 
too much attention cannot be given to designing the systems, 
records, and forms to fit those needs. 

But a correct system and its adjuncts cannot cure all 
evils and failings. Its forms, records, and routines are only 



SYSTEMS, RECORDS, AND FORMS 445 

the tools by which control can be planned and scheduled in such 
a way that performance may be in accordance with needs and 
that any failure of performance to meet such needs may be 
known in time to apply corrective measures. 

While the system furnishes the mechanism, it must be 
supplemented by sound judgment, by real work, and by strict 
attention to details. However, it can be stated without reserva- 
tion that the systems, records, and forms of an organization 
clearly indicate the degree of closeness in the managerial control 
exercised by the organization heads. 



INDEX 



Acceptances (See "Trade accept- 
ances") 
Accounting, 
balance method, 49 
charging stores, account, 38 
inventories, 32, 39-57 

charged to requisitions at actual 
cost, 58 
records, 107 

running total method, 50 
stores ledger, 39-57 
Accounting Department, 
functions of, 19 
inventory taking by, 192 
invoice, handling of, 392 
Accounting section, 
materials control department, 
210 
Accounts, 

classification, 95-96 
controlling, 32 

function of, 94-95 
work in process, 32, 129 
Administration, 437-445 

materials control department, 14 
Agencies, 

statistical, 293-296 
Agency, 

law of, 415 
Aisles, 

storesrooms, 160, 162 
Alphabetic symbols, 91, 99 
Appropriating material, 48 

form, 51 
Assignment of contract, 414 
Auditing division, 
functions of, 19 



Authorization, 
purchases, 15, 54 
form, 53 

B 

Balance of accounts, 49 
Balance sheet, 108 
Bids, 331 

form, 332, 333 
Bills of lading, 373 
Bin tag, 172 

form, 173 
Bins, 165 

Blanket contracts, 288 
Blue-prints, 

graphic production control, 229 
Branch storesrooms, 167 
Bribery, 321 
Budget, 

inventories or stores, 30 

preparation, 109 
Burden 

carrying charges on inventories, 
132 

in process account, 130 

statement, 109, 128 
Buying (See "Purchasing") 
By-Product Stores, 

defined, 32, 33 



Carrying charges, 

inventories, 132 
Cash disbursement register, 400 

form, 399 
Caveat emptor, 407 
Charge symbol, 

stores requisition, 72 



447 



448 



INDEX 



Checking, 

purchase orders, 286 
Checks, 

requisition for, 395 
form, 394 
Classification of accounts, 94 

form, 97 

relationship to classification of in- 
ventories, III 
Classification of inventories, 31 94- 
106, 189 

general stores, 96-99 
form, 97 

service department stores, 100 

systems, 86-93 

what to include, 53 
Component parts, 

inventory tag, form, 195 
Component parts stores, 

defined, 31, 33 
Continuous production, 

as affecting materials control, 12 
Contracts, 

assignment, 414 

blanket contracts, 288 

legal aspects, 401-418 

mistakes in, 410 

purchasing departments, 270- 
272 
Control board, 226, 234-237 

registering progress on orders, 
250 

scheduling jobs, 245 
Control progress strips, 232 

form, 235 
Cost department, 

functions of, 19 

inventory taking by, 195 
Cost-plus contracts, 338 
Costs, 

actual, 65 

actual versus standard, 64 

average cost methods, 67 

class cost methods, 117 

current cost methods, 67 



Costs — Continued 
distribution of, for material used, 

121 
elements of, 4, 28 
estimating, 62 
expense and burden statements, 

128 
expense ledger slips, 127 
form, 127 

job or order method, 117 
journal entries, 125-127, 

form, 126 
ledger, 1 10-113 

form, 112 
manufactured material, report on, 

60 

form, 61 
method of determining, 58, 67, 

117 
operation method, 118 
pricing system to determine, 58 
production sheets, 243 
purchased material, 61 
records, 118 

handling, 119 

reporting deliveries to stores, 
125 

returned goods, 123 

stores requisitions, 121 

summary of material used, forms, 
122, 123 

symbolization, 1 07-1 16 

time cards, 119 
standard versus actual, 64 
statements, 109, 128 
tabulating production order costs, 
128 

form, 129 
work in process account, 129 
Counting machines, 167 
Credit, 
information, 319 

form, 315 
stores returned, 78 

form, 79 



INDEX 



449 



Damage claims, 374 

Danger point, for quantity, 49, 81 

Defective and spoiled material, 

inspection reports, 248, 388 
form, 389 
Delegation, of authority, 438 
Delivery from stores, 181, 213 
Delivery of purchases, 271, 349-352, 
361-376 

allowance for time in transit, 351 

charges for, 340 

conditions, 308-310 

delays in, 361-368 
forms, 363, 364, 366 

difficulties, 350 

effecting , 350 

factory requirements, 351 

follow-up^of, 361-365, 369 
forms, 363, 364 

individual orders on contract, 348 
Delivery to stores, 70, 213 

cost records, 124 
Demand (See "Supply and demand ") 
Demurrage and damage claims, 374 
Direct Labor in Process account, 130 
Discipline, 

secured by control of material, 7 
Discount, trade, 335, 342 
Dispatch board, 227, 237 
Dispatchers, 249 
Dispatching supervisor, 222 
Double-space storage method, 169 
Duplicate tag inventory method, 186 

E 

Efficiency, 

tested by inventories, 6 
Efficiency reports, 252 
Engineering Department, 

functions, 22 
Estimates, 

quantity required, 43 



Expense, 

ledger slip, 127 
form, 127 

statements, 128 
Expense orders, 

nature of, 37 



F. o. b. destination, 341 
Finished product, 

inventory control, 139 

inventory tag, form, 195 
Finished product stores, 16 

defined, 31, 33 
Follow-up records, 229, 243 

form, 230 

purchase deliveries, 362-365, 369 
forms, 363, 364 

shipment of goods, 369-376 
Forms, 443-445 
Fraud, 411 
Freight rates, 372 
Future delivery, 

stores, 77 

G 

General stores 

classification, 53, 96-99 
form, 97 

defined, 31, 33 
Graphic methods, 

market analysis, 296 
forms, 297, 299, 300, 301 
Graphic production control (See also, 
"Production control depart- 
ment") 

advantages, 225 

blue-prints, 229 

control boards, 226, 234-237 

control progress strips, 232 
form, 235 

cost sheet, 243 

dispatch board, 227, 237 

dispatching work, 247, 249 



450 



INDEX 



Graphic production control — Con- 
tinued 
efficiency reports, 252 
follow-up records, 229, 243 

form, 230 
forwarding requisitions to storage 

division, 247 
function, 224-226 
idle equipment report, 232, 250 

form, 234 
idle time reports, 252 
inspection reports, 232, 248 

forms, 233 
instruction cards, 229, 240 

form, 231 
job registration, 248 
material credit cards, 229 

forms, 232 
material requisitions, 229 

forms, 229 
mechanism for, 226-253 

forms, 227, 228, 230-236 
pay-rolls, 251-252 
posting accomplishments, 251 
progress records, 229, 243, 250 

form, 230 
registering materials, available for 
production, 246 

form, 36 
routing cards, 229, 243 

form, 231 
scheduling jobs, 245 
standard machine practice card, 
237, 240 

form, 227 
standard parts list records, 227, 241 

form, 228 
standard production analysis re- 
cords, 229, 241-243 

form, 228 
symbol code, 244 
time cards, 229, 243, 251 
collection of, 249 
form, 233 
Gratuities, 321 



Headings, 

stores record, 52 



Identification cards, 229, 243 

form, 231 
Idle equipment, 232, 250 

form, 234 
Idle time reports, 252 
Importance of material control, 3 
Inspection Department, 
functions, 21 

inventory taking by, 191 
Inspection reports, 232, 248 

form, 233 
Instruction, 
arrangement of stores room in 

writing, 158 
cards, 229, 243 

form, 231 
taking inventory, 187 
Interrupted production, 

as affecting material control, 12 
Inventories (See also "stores") 
account, 32, no 
charged to requisition at actual 

cost, 58 
symbols, 114 
adjustments, 68 
balancing of, with stores record, 84 

form, 83, 85 
budget, 30 
carrying charges on overhead, 

132 
classification (See "Classification of 

inventories") 
consumption record, 137 

form, 138 
control of, 5 
policies of, 131 
procedure for, 134 
co-ordinating requirements and 
schedules, 45 



INDEX 



451 



Inventories — Continued 

correlation with production and 

sales program, 27 
costs, how determined, 61 
future requirements, 139 
increasing stock of, 54 
issued, before price is known, 62 
new or replenished material, how 

determined, 54 
perpetual, 42 

form, 43 

limitation of, 53 

pricing. 59 
quality 25, 26 
quantity available, 44 

form, 45 
quantity control, 43, 44, 49, 133- 
138 

form, 47, 138 
reconciling stores records, 59 
statistical reports, 31 
taking of, 183-200 

accounting department, 192 

checking counts, 185-186 

classification of items, 189 

cost accounting department, 

193 

directing, 188 

duplicate tag method, 186 

forms, 194, 195, 196, 199 

inspection department, 191 

instructions for, 187 

materials control department, 

190 
necessity for, 184 
period for, 188 
physical, 184 
preparations for, 187 
pricing items, 198 
production department, 190 
purchasing department, 191 
receiving department, 191 
sales department, 192 
salvage department, 191 
storesrooms, 19Q 



Inventories — Continued 
taking of — Continued 

supervision, 197 

tags, 
forms, 193-198 
test of efficiency by, 6 
time needed to procure, 25 
up keep, 25 
unclassified, 54 
valuation, 31 

loss from deterioration, 68 
verifying, 180 

withdrawn when exhausted, 54 
work in process account, 32 
Invoice, 
received, 

adjustments, 390-392 

checking of, 382-385 

forms, 386, 387, 391, 393, 394 

payment of, 377-379. 392 

registration of, 379 

routine, 377-384 
voucher register, 395-400 

forms 393, 394, 396, 398, 399 
Invoice division, 

purchasing department, 429 



Jobs, 

scheduling on control board, 245 
Journal, 

entry, 125-127 

form, 126 
voucher, 
form, 126 



Labor, 

direct, 

work in process account, 130 
Layout, 

storesroom, 159 
Ledger, 

Cost ledger, 110-113 



452 



INDEX 



Ledger — Continued 
relationship of various kinds, 1 1 1- 
114 
form, 112 
stores, 39-57 

(See also "Stores records") 
work in process, 120 
Location, 
change of, 

form, 179 
of stores on requisition form, 74 
storesroom, 159 
Loose-leaf methods, 41, 126 

M 

Mail-order delivery, 181 
Management, 

phases, 3 
Manager, 

production control department, 
221 
Manufactured parts received report, 

124 
Manufactures (See also "Finished 
product , " " Parts , " " Produc- 
tion") 
various types affecting material 
control, II 
Manufacturing, 
cycle, 6, 32 

material received reports, 71 
relation of materials control de- 
partment to, 17 
Markets, 

analysis, 293-310 
Material credit cards, 229 

forms, 232 
Material in process account, 130 
Material received reports, 
manufactured materials, 71 
purchased material, 70 
Materials (See also "Inventories," 
"Purchasing," "Stores") 
issued on specifications, 78 



Materials — Continued 

not on hand, 78 
form, 77 

quality or grade, 25, 26 

record, 282-285 

registering available, 246 
form, 236 
Materials control, 

elements of, 5 

functions of, 25 

importance of, 3 

steps in establishing, 183 
Materials control department, 

accounting section, 210 

administration of, 14 

estimate of consiunption and bal- 
ances, 307 

functions of, 15, 201 

general storeskeeper, 202 

inventory taking by, 190 

organization, 201-213 
chart, 205 

planning section, 206-208 

procedure for ordering, 17 

recording section, 208-209 

relation to plant, 17, 201 

scheduling section, 209 

storage division, 211 
chart, 212 

supervisor, 221 

weekly report, 306 
Mechanical handling of, 

stores, 164 
Monthly cost reports, 107 

N 

Numerical symbols, 91, 99 
O 

Office manager, 

functions, 22 
Office supplies, 

control of, 140 



INDEX 



453 



Order control supervisor, 221 

Order requisition (See "Purchase 

requisition") 
Order to stock material, 54 

form, 55 
Ordering point, 49, 81 

form, 47 
Ordering quantity, 49, 133-138 

form, 47, 138 
Orders (See also "Expense orders," 
"Plant-increase orders," "Pro- 
duction orders," "Purchase or- 
ders") 
classified, 36 
nature of, 36 
procedure for, 17 
symbols, 115 
Organization, 9-22 
chart, 

form, 20 
elements of, 1 1 
lack of, 9 

manufacturing types affecting, 11 
materials control department, 201- 
213 

chart, 205 
production control department, 
217-223 
chart, 218 
purchasing, 419-433 
purchasing department, 272 



Parts, 

standard parts list record, 80 

storesroom for, 16 
Pay-rolls, 251 
Personnel, 

Production control department, 
220 
Piling of stores, 174, 176 
Planning division, 

materials control department, 206 

purchasing department, 424 



Plant-increase orders, 

nature of, 37 
Posting, 

accomplishments, in production 
control, 251 

mechanical methods v. hand, 82 

stores requisition, 78 
Prices, 

based on performance, 337 

competitive, 334 

consideration of, 334 

contract record, 328 
form, 329 

current, 338 

definite, 337 

determining, 268 

fixing, 289, 336 

kinds of, 305-308, 336-340 

list, 339 

maintenance, 335 

net, 339 
Pricing, 

actual cost methods, 65 

actual cost versus standard, 64 

advantages, 58 

average cost methods, 67 

current cost method, 67 

estimating, 62 

inventory items, 198 

known before material is issued, 62 

recording, 58, 60 

requisitions, 64-68 

unit values, 58 

how determined, 60 
Principal and agent, 417 
Procedure, 

Illustration of, 34 
Production, 

continuous or interrupted, 1 1 

correlation with inventories, 27 

material control, relation to, 4 

program, 27 

co-ordinating requirements with, 

45 
quantity control, 136 



454 



INDEX 



Production control department (See 
also "Graphic production con- 
trol") 

dispatching supervisor, 222 

functions, 217 

manager, 221 

materials control supervisor, 221 

order control supervisor, 221 

order handling procedure, 218- 
220 

organization, 217, 223 
chart, 218 

personnel, 220 

relations with, materials control 
department, 202 

tool control supervisor, 223 
Production departments, 

advance information, to purchasing 
department, 350 

inventory taking by, 190 
Production orders, 

administered by materials, con- 
trol department, 1 5 

estimate for, 1 39 

handling procedure, 218-220 

nature of, 36 

routine, 239 

tabulating costs, 128 
form, 129 
Profit and loss, statement, 108 
Progress and follow-up records, 229, 

243 
form, 230 
Purchase contracts, 
blanket, 347 
cost-plus, 338 
discharge of, 349-352 
features of, 347 
individual orders, 348 

form, 354 
invoice, 377-384 
records, 328 

form, 329 
time for completion, 352 



Purchase orders (See also "Delivery 

of purchases," "Delivery to 

stores") 
accuracy of, 323 
administered by materials control 

department, 15 
blanket contracts, 288 
contract record, 328 

form, 329 
delays in delivery, 361-368 

forms, 363, 364, 366 
follow-up, 362-365, 369-376 

forms, 363, 364 
forms, 354, 355, 356, 359 
individual, on blanket contract, 

348 

inspection for accuracy, 357 

manufactured part received report, 
124 

maximum and minimum quanti- 
ties, 43 

material received reports, 70 

nature of, 36 

progress reports, 368 

price fixing, 289 

quantity, 288 

quotations and past records, 328- 

331 

form, 330 
receiving and checking goods, 385- 

390 

forms, 386, 387, 389 
record of supplies on order, 44 

form, 45 
routine, 353-357 
rush orders, 368 "~- 

ship and trace, 368 

form, 366, 367 
shipment of goods, 369-376 
vendor's acceptance, 358-360 

form, 360 
Purchase requisitions, 285 
checking, 286 
contents, 80 
control of, 289 



INDEX 



455 



Purchase requisitions — Continued 
features of, 80 
form, 81, 285 
questionable, 276 
routine, 81 

time allowed to complete, 350 
Purchasing, 
bids, 331 

form, 332, 333 
bribes, 321 
confidence between seller and 

buyer, 326 
correlation of factory demands 

with market conditions, 395 
credit information, 319 

form, 315 
departmental buying, 258 
discount, 335, 342 
elements of good, 261 
fundamental considerations, 273- 

289 
gratuities, 321 

legal aspects, 317-319, 401-418 
market analysis, 293-310 

form, 295 
payments, 342 
personal ties between seller and 

buyer, 317 
prices, 334-346 
purchaser's requirements, from 

vendor, 324 
sales contracts, 31 1 
seller and buyer, 311-327 
specifications for, 278-281 
technical knowledge, 276 
time needed to procure, 25 
transportation charges, 340 
use of data, 286 
vendors, information on, 308 
Purchasing agent, 259, 430-433 
assistant, 429 
attitude toward salesman, 314- 

317 
duties, 422 
integrity of, 321 



Purchasing agent — Continued 
personal relations of, 263 
qualifications, 421 
Purchasing department, 
agent, 259 
central office, 420 
contracts, 270 
deliveries, 271 
filling out the order, 266 
function, 265 
good buying, 261 
inventory taking by, 191 
invoice division, 429 
markets, knowledge of, 267 
materials, record, 282-285 
organization, 272, 419-433 

chart, 425 
place in manufacturing procedure, 

6 
planning division, 424 
prices, determining, 268 
profits through savings, 260 
quotation division, 426-428 
records, 262 
relation to plant, 17 
reputation of, 263 
scheduling division, 428 
service record, 325 

form, 326 
sources of supplies, 308-310 

form, 309 
specialized purchasing, 259 
specifications in, 153, 278, 281 
subordinate departments, 420 
subsidiary offices, 419 
vendors, selection of, 267 



Quality, 

control of, 25, 26 

inspection of, 388 

selection of, 273 
Quantity, 

control of, 25, 26, 43 

danger point of ordering, 49 



456 



INDEX 



Quantity — Continued 

estimating requirements, 45 

keeping track of, 44 

ordering quantity and ordering 
point, 49 
form, 47 

production control, 136 

purchase control, 43, 133-138 
form, 47, 138 

purchase orders, 288 

stores requisition record of, 72 
Quotation division, 

purchasing department, 426 
Quotation file, 328-331 

forms, 309, 326, 330, 332, 333 



Raw materials, 

inventory tags, form, 194 
Raw materials stores (See "General 

stores") 
Receiving department, 

inventory taking by, 190 
Recording section, 

materials control department, 
208 
Records, 440-443 (See also "Stores 
records") 

functions to be covered by, 25 

purchasing department, 262 
Remittance letter, 397-400 

form, 398 
Renewal of stock, 

how determined, 54 
Requisitions (See also "Purchase 
requisition," "Stores requisi- 
tions") 

check, 395 
form, 394 

entered upon a stores record, 59 

pricing, 64-68 

procedure for, 17 
Research department, 

to determine quality, 26 



Routing, 

stores requisition, 75 
Routing cards, 229, 243 

form, 231 
Ruling, 

stores record, 42 
Running total method of accounts, 50 
Rush orders, 368 



Sales, 

correlation with inventories, 27 

law of, 401-418 

program, 27 
Sales department, 

inventory taking by, 192 
Sales price, 

elements of, chart, form, 29 
Salesman, 

report on customer, 313 
form, 315 
Salvage department, 

inventory taking by, 191 
Salvage stores (See "By-product 

stores") 
Scheduling division, 

materials control department, 209 

purchasing department, 428 
Scrap stores (See "By-product 

stores") 
Service department stores, 

classification, 100 
Ship and trace, 368 

form, 366, 367 
Shipment of goods, 

bills of lading, 373 

demiirrage and damage claims, 

374 

follow-up, 369-376 

routings, 375 

transportation charges, 371 
Shipping order, 

stores requisition, copy of, 73 
Signal tags, 233 

form, 236 



INDEX 



457 



Skids, 1 66 

Space, storage, 163 

Specifications, 153 

purchases, 278-281 
Standard parts list record, 80, 241 

form, 228 
Standard practice records, 227, 240 

forms, 227, 228, 230 
Standard production analysis records, 
229, 241-243 
form, 228 
Standardization of materials, 142- 
149 
advantages, 143 
control of, 145 
determining, 144 
examples of, 147 
specifications, 149-155 
Standing orders (See "Expense or- 
ders") 
Statistical reports, 31 
Storage units, 165 
Storage workers, 156 
Stores (See also " By-product stores," 
"Component parts stores," 
"Finished product stores," 
" General stores," " Inventories") 
Stores control (See "Materials con- 
trol") 
Stores department, 
administered by materials control 

department, 15 
function of, 13 
Stores records, (See also "material 
received reports") 
accuracy of, 83 

fomi, 83 
balancing of, with inventory, 84 

form, 83, 85 
complete set necessary, 16 
functions, 17 

form, 18 
ledger, 39-57 

appropriated material, 
form, 48, 51 



Stores records — Continued 
ledger — Continued 

balance method, 49 

forms, 43, 45, 46, 47, 51, 55, 56 

headings, 52 

information in, 40 

method of keeping, 41 

opening, 52 

purposes of, 39 

reconciling balances, 59 

ruling, 42 

running total method, 50 

unclassified stores with form, 56 
perpetual inventory card, 42 
posting, 82 

pricing, 58-69 (See also "Pricing") 
stores balance sheets, 49 

forms, 43, 45, 46, 47 
Stores requisition, 
charge symbol, 72 
corrections on, 75 

form, 76 
cost record, 30, 121 
countersigned, 75 
features of, 71 

form, 72 
filing, 181 

forwarding to storage division, 247 
future delivery, 77 
location designation, 74 
material and symbol, 74 
material not on hand, 78 

form, 77 
material of exceptional v^lue, 76 
posting to ledger, 78 
production requirements, 229. 245 

form, 232 
quantity record, 72 
routing of, 75 
shipping order, 73 
substitute for, 80 
time wanted, stated on, 75 
Stores returns, 78 
cost records, 123 

form, 79 



458 



INDEX 



Stores system, 

importance of, 27 
Storesrooms (See also "Storage") 
aisles, 160, 162 
bins, 165 

branch storesrooms, 167 
counting machines, 167 
decentralization of, 16 
delivery system, 180-182 

forms, 181 
finished goods and parts, 16 
general location of, 16 
inventory taking by, 190 
layout, 159 
location, 159 

materials control department di- 
vision, 211 

chart, 212 
mechanical aids, 164-167 
planning, 156 
size, 160 
skids, 166 
space, 163 

storage of material, 156 
storage units, 165 
trucks, 166 

written directions, 158 
Stowage, 168-182 

forms, 173, 175, 179, 181 
bin tag, 172 

form, 173 
change of location, 179 

form, 179 
counting materials, 177 
double-space method, 169-170 
distinct storing, 171 
identifying materials, 172 
piling materials, 174, 176 
removal of goods, 178-179 
special items, 170 
surplus stock, 174 

form, 175 
systems, 168 
unit of, 176 
Supplies stores (See "General stores") 



Supply and demand, 303-304 
Symbols, 
alphabetic and numerical, 91, 

99 

charge, on stores requisition, 72 
classification systems, 89-91 
cost records, 107-116 
general stores classification, 96, 99 

form, 97 
inventory account, 114 
on stores requisition, 74 
orders, 115 
standard operation symbol code, 

244-245 
storage spaces, 163 
System, 437-445 



Tags, 

inventory forms, 193-198 

inventory method, 186 

signal tags for control board, 233 
form, 236 
Terms of sale, 308-310 
Time cards, 119, 229, 243, 251 

collection of, 249 

form, 233 

on control board, 245 
Time wanted, 

stated on stores requisition, 76 
Tools, control supervisor, 223 
Trade acceptances, 343-346 

form, 344 
Traffic department, 

functions, 21 
Transportation charges, 340, 371 

checking of, 384-385 
Trucks, 166 



Unclassified stores, 54, 56 

form, 56 
Unit price, how determined, 60 



INDEX 459 

V Voucher — Continued 
register, 395-400 

Valuation, forms, 393, 394, 396, 398, 399 
inventories, 31, 68 
recording price, 58 

Vendor, Warranties, 407-409 

acceptance of purchase orders, 358- "Work in process (See also "Graphic 

360 production control") 

form, 360 account, 32 

data for, 319 burden in process account, 130 

information concerning, 308 control accounts, 129 

personal contact with, 313 control of, 140 

purchasing agent's attitude to- inventory tag, 196 

ward, 314-317 ledger, 120 

Voucher, Worked materials stores (See "Com- 

joumal, form, 126 ponent parts stores") 



341 90 



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^ AUG 90 




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